Tag Archives: company

Why the Cannabis Industry Must Combat Degree Inflation

By Tori Gates
No Comments

The hiring process is evolving: major U.S. employers are reconsidering the significance of higher learning. An employer’s undue emphasis on university education while hiring is called “degree inflation.” As the hiring manager for NisonCo, a cannabis public relations, marketing and SEO agency, I have learned a college degree is not the best predictor of employee success.

NisonCo was established during the dawning of the modern cannabis legalization movement. At the time, our small staff included individuals with and without college degrees. I evaluated both groups of employees and learned they gave equal contributions to the team. Limiting our pool of potential candidates to university graduates would have hindered the growth of our company.

Accordingly, at NisonCo a college degree is not required to work. We believe degree inflation impedes hiring, increases payroll, encourages turnover and perpetuates social injustice. For these reasons, NisonCo encourages your cannabis company to emphasize a candidate’s skills and drive during the hiring process rather than their education. 

Degree Inflation Increased in the Aftermath of The Great Recession 

The Great Recession in 2008 caused a massive downturn in the U.S. economy. By 2010, the workforce had lost nearly 9 million jobs. The unemployed entered a tight labor market, and employers had the luxury of limiting potential candidates to college graduates. After the economic downturn, the number of employers requiring a college degree increased by 10%

Employers added degree requirements to positions previously staffed by high school graduates. In 2015, 67% of job postings for production supervisors required a degree, while only 16% of current production supervisors possessed degrees. The Great Recession pushed Americans without a college degree out of the labor market. 

Technological Advancements and Social Movements Confront Degree Inflation

The importance of technical skills began declining when automation entered the workforce in the 1980s. Employers suddenly required soft skills like relationship management to serve customers and resolve conflicts with partners successfully. A technologically advanced economy requires problem-solving and people skills. These skills are not usually acquired while attaining a college degree.

Most employers confirmed degree inflation prevents them from hiring equipped employees.

During the Covid-19 pandemic, companies laid off millions of employees. Many unemployed people reconsidered their relationship with work and decided to leave unfulfilling jobs. Employers are now in dire need of staff, and they no longer have the privilege of requiring a college degree during the hiring process. This degree inflation prevents recovery from the economic downturn caused by the pandemic. 

The Black Lives Matter movement highlighted the need to deliver social justice to historically marginalized communities. Americans are learning these communities need economic opportunities to achieve social justice. For this reason, employers are reexamining hiring practices and identifying barriers to equity. Employers like NisonCo have recognized since company inception that degree requirements impede social justice.

Degree Inflation is Bad for your Cannabis Business

The Harvard Business School polled business leaders on their perception of the performance of employees with and without degrees. The polling revealed the hidden costs of degree inflation: pending positions, payroll premiums, poor productivity and high turnover. Undoubtedly, degree inflation is not suitable for your cannabis business.

Most employers confirmed degree inflation prevents them from hiring equipped employees. They admit that candidates without degrees may possess the skills needed to thrive in most positions. Often, degree inflation prevents the discovery of competent candidates without degrees.

Most respondents revealed that degree inflation places a premium on wages for college graduates. Many respondents also confirmed those with and without degrees provide equal contributions to their teams. Degree inflation adds unnecessary payroll and training costs to a company’s budget.

Many employers believe staff members with university degrees demand higher salaries and benefits than staff without degrees. Additionally, most respondents admitted employees with degrees demonstrate low productivity and experience high job dissatisfaction. As a result, employers witness increased turnover among college graduates. In my experience, degree inflation can prevent employers from finding productive, satisfied, and loyal employees.

5 Ways Your Cannabis Company Can Oppose Degree Inflation

  1. Review Your Company’s Job Descriptions and Assess Contributions to Degree Inflation 

I recommend reviewing your company’s positions and determining if they are prone to degree inflation. Evaluate job descriptions written by leaders in the cannabis industry to understand if your degree requirements contribute to degree inflation and consider dropping degree requirements for positions that are common contributors to degree inflation.

  1. Identify the Technical and Soft Skills Needed for Positions in Your Company

I advocate for analyzing the technical and soft skills needed for positions in your cannabis company. Review your job descriptions to determine if they require soft skills a candidate without a degree could possess. Delete degree requirements from job descriptions that do not need technical education provided by universities. Additionally, review the vetting process for candidates and remove onerous education requirements for positions requiring additional soft skills.

  1. Analyze the Costs of Your Company’s Contribution to Degree Inflation

Understanding your cannabis company’s contribution to degree inflation lowers the costs of sustaining it. Developing metrics for evaluating contributions to degree inflation helps assess the charges to your company. Realizing your company’s potential cost savings helps maintain a commitment to combating degree inflation.

  1. Develop Your Company’s Pipeline of Non-Degree Employees

Your cannabis company should develop alternative talent pipelines to attract non-degree employees. Investments in training create talent pipelines that give your company access to new pools of competent and productive candidates. Investments in training attract employees without college degrees and confront degree inflation. 

  1. Expand Your Company’s Territory for Recruiting New Employees

I recommend expanding your company’s geographic footprint while recruiting. Establishing relationships with partners in new territories provides access to new pools of non-degree talent. Expansion of your recruiting territory withstands degree inflation. 

The Cannabis Industry Should Commit to Combatting Degree Inflation

Legalizing cannabis began as a social justice movement to benefit historically marginalized communities, and the maturation of our industry can deliver social justice to these communities. The cannabis industry has a prime opportunity to be an excellent example for other sectors confronting degree inflation. Our industry must demonstrate how different sectors can resist the urge to support it.

A Q&A with Brandon Barksdale, CEO of Dalwhinnie Enterprises LLC

By Cannabis Industry Journal Staff
No Comments

Dalwhinnie Enterprises is a cannabis brand that started in Ridgeway, Colorado. Based in the San Juan Mountains in Western Colorado, the company includes brands like Dalwhinnie Farms Cannabis, Shift Cannabis, Ridgway Hemp Company and the Dalwhinnie Farms Boutique in Aspen, Colorado.

Brandon Barksdale has about a decade of experience in cannabis. He has worked for small startups and large multi-state operators. Most recently, he has worked with CohnReznick’s Advisory Practice. At CohnReznick, he worked alongside the Dalwhinnie team, helping them launch their boutique in Aspen. Since joining the team as their new CEO, Barksdale has shifted his focus to expansion, scalability and operational excellence, using things like GMPs and other certifications to improve quality and consistency.

We caught up with Barksdale to learn about his experience, his new role, entrepreneurship, social equity and what it means to be a minority leader in the cannabis space.

Cannabis Industry Journal: You have an impressive background before joining the cannabis industry full time. What made you take the leap into this space? Tell us about your background.

Brandon Barksdale: The majority of my background is driven around transforming businesses cross functionally, specifically in operations and finance. When it comes to the cannabis industry, it still lacks maturity; so being able to apply key performance indicators, benchmarking, controls and analytics can drive the industry, and more specifically, our organization, to operational excellence.

Brandon Barksdale, CEO of Dalwhinnie Enterprises LLC

While I was in the professional service space, I was an advisory leader within our cannabis industry group. I was able to be involved and work with organizations at differing levels of maturity, guiding corporate strategy and functional and operational improvement before fully jumping in to lead this organization. Dalwhinnie was the perfect opportunity to use my previous experience to instill value to the company as it continues to scale and grow.

CIJ: With a such a big portfolio of cannabis clients, why leave all that behind to take the reins at Dalwhinnie?

Barksdale: Simply put, I was eager to roll up my sleeves and drive a single organization through its growth lifecycle. When you’re working with and cycling through multiple clients, you’re supporting them from a strategic perspective and providing value and direction but the execution is left to the operational teams internally to follow through. No matter how detailed the plan or deeply you are involved you are still third-party. During scope changes and ramping up and down there’s always some momentum that gets lost. I want to focus on one company, to really tie myself to its DNA, so that I can better be in the driving seat toward success and operational excellence.

Dalwhinnie stands out because of their unwavering focus on quality and the integrity of the brand. To that end, I want everyone within the organization to succeed and to nurture a healthy company ecosystem that allows for professional development, training and being an industry leader. We have a really big opportunity here to set the standard for what quality looks like going forward and what it means to really care about the product that you’re putting out into the marketplace.

CIJ: Dalwhinnie Farms has a cool location in Ridgway, Colorado at the base of the San Juan Mountains and sustained by the snowmelt from the Uncompahgre River.  How does this make Dalwhinnie cannabis different?

Barksdale: There is no doubt that growing at a high elevation with different seasonalities is a challenge. However, every region on Earth presents its own benefits and challenges as it relates to cultivation. You can use the comparison to different regions of wines. Wine from Bordeaux and wine from Napa are going to have different profiles because of all the unique factors of climate, water, humidity, aging practices, etc.

Dalwhinnie Farms in the Sun Juan Mountains

This is one of the things that will make the future of cannabis very interesting. There are multiple elements and variables that help tell the story of the product through its experience of growth. Just like there are tons of wine regions and varietals, there are hundreds of cannabis strains and exponentially more crosses where one can discuss multiple facets of what makes that particular product unique. It is one of the things that will continue to evolve in the cannabis market and one of the most exciting components—knowing that we are still on the way to creating a unique and original marketplace!

CIJ: The Dalwhinnie Farms retail store in Aspen is a unique cannabis dispensary. What is the retail strategy moving forward?

Barskdale: Every cannabis wholesaler, and most markets, are feeling the pressure of price volatility and retail is one of the best-known ways to help stabilize an organization. Our strategy is to stay as nimble and creative as we can, focusing on continuing to build out the success of our flagship Aspen dispensary as well as partnering and entertaining retail expansion opportunities. Our strategy is not to ignore that fact, but to act as perceptively as we can to broaden our retail footprint.

The Dalwhinnie Boutique in Aspen, CO

CIJ: Tell us about your short-term goals for Dalwhinnie.

Barksdale: When I came onboard with Dalwhinnie, I hit the ground running. I had some history with Dalwhinnie and the family of companies so I was lucky to have a head start and insight toward necessary changes. Short term goals included attention to production expansion initiatives, operational changes that moved us closer to excellence, and fine-tuning our GMPs. My eye is also focused on company culture, performance management, and constantly pushing the envelope on quality. While always of importance, we want to continue as a pioneer on cultivation and manufacturing standards as it relates to quality in organics.

CIJ: And what are your long-term goals for the company?

Barksdale: Mentioned as a short-term goal, I want to move toward GMP and GACP manufacturing standards and create a continual cycle of improvement as we move through our expansion and growth plans. In the future, multi-state operations and partnerships are also a big part of our strategic direction. We aim to continue to provide an elevated cannabis retail experience at our flagship location and to expand our retail footprint in the marketplace.

CIJ: There’s been a focus on racial disparities in the cannabis space and the need to improve social equity and opportunities for minorities. How do you hope to support equity and help drive change?

Barksdale: We are at a turning point in the industry where substances are becoming legal, yet so many people are still suffering from nonviolent, non-serious offenses related to cannabis. It is unavoidably apparent and it is something that deserves significant attention and commitment. Every company that is operating in this space should take a level of responsibility to help address or support reparations in some fashion whether that be through jobs, access, and/or partnerships.

There should be an obligation to support some type of social equity improvement project as it relates to the cannabis industry. Some legacy states and now new states coming online, are attempting to course correct by making it a part of the compliance or access components for licenses.

There is still a lot of work to be done. I am working through the strategies that work for us as a company. I am actively exploring how to incorporate opportunities into our operating and business model.

As a women-owned company and myself being a minority leader, it is on the forefront of our priority list to come up with a comprehensive plan and commitment to supporting social and equities in this space.

Flower-Side Chats Part 5: A Q&A with Bob Fireman, CEO of MariMed, Inc.

By Aaron Green
No Comments

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

Multi-state operators (MSOs) are on the rise in the United States, navigating complex regulatory frameworks to drive profitability through economies of scale and scope. As an MSO and an early mover in the space, a significant part of MariMed’s current strategy is to complete the acquisition and consolidation of the licensed state cannabis businesses it has developed. It takes seasoned leadership to make that happen, and MariMed’s is led by one of the most experienced and successful MSO management teams in the industry. Over the last eight years, Bob Fireman and his colleagues have won 17 licenses in 6 states, and designed and developed over 300,000 square feet of cannabis cultivation, production and dispensing facilities.

MariMed has also developed a portfolio of award-winning cannabis brands and infused products which are licensed, manufactured and distributed in Delaware, Illinois, Maine, Maryland, Nevada, Rhode Island and Puerto Rico. A recently announced $46 million financing for a facility with Hadron Healthcare Fund will help repay all MariMed debt other than mortgage-backed bank loans and one convertible note, as well as help upgrade and expand the company’s owned and managed cannabis facilities.

We spoke with Bob Fireman, CEO of MariMed. Bob started the foundations of MariMed in 2008 after getting into large-scale hydroponics for urban sustainable agriculture. Prior to MariMed, Bob served as a startup lawyer focused on tech and emerging industries.

Aaron Green: Bob, tell me about how you got started in the cannabis industry.

Bob Fireman: I practiced law for decades. Part of my practice was to help startups in all sorts of industries, particularly technology and new emerging markets. At one point, I was introduced to a fascinating sustainable food business opportunity – to build hydroponic farms on rooftops in cities across the country.

Bob Fireman, CEO of MariMed, Inc.

When one of our projects in San Francisco hit some roadblocks, our team there pivoted to what was becoming the Wild West of California cannabis. My friend and current MariMed CFO, Jon Levine, and I began investing and managing a cultivation site there. That’s where we built our early foundation of industry knowledge.

Fast forward a few years, and I was afforded the opportunity to be involved in the drafting of the proposed Massachusetts medical cannabis legislation.

Through that work, we met a team that had won one of three cannabis licenses in Rhode Island. We formed a real estate LLC and raised the capital to develop a seed to sale cannabis facility in Providence, which was later leased to the Slater Center, a not-for-profit medical cannabis licensed business. Today, the Slater Center is a nationally acclaimed operation that services over 10,000 medical patients.

From there, we took our know-how and formed a new entity that was the formal beginning of the company we now know as MariMed. Initially, we helped win licenses for clients in Massachusetts, Delaware, Maryland, Illinois and Nevada. We also provided management services, working capital and other necessities. Under our management, we organically built these businesses from the ground up, advancing best practices and somewhat quietly creating a network of best-in-class operations throughout the industry.

That led to the consolidation of those businesses that we’re focused on today as a core strategic pillar.

I’m incredibly proud of our team, the core of which has been at this for 10 years. We’ve watched other MSOs try different models of success, with varying degrees of success. For us, focusing on growth markets, building at a reasonable and scalable clip, attracting incredible talent at all levels of the company, and developing fantastic brands that customers love, are the ingredients that have translated to where we are now – strong performance and an exceptionally bright future. “Slow and steady wins the race” has become a mantra.

Green: What trends are you looking at right now? What’s on your radar?

Fireman: My radar has a singular focus, and that’s to create shareholder value. That’s why completing the consolidation of the cannabis licensed businesses we’ve developed and manage into our public company is so critical. Back in the day, the initial available licenses were in medical-only state programs where applicants were required to be not-for-profit state companies. Accordingly, we raised the capital in the real estate entity which leased facilities to the licensees. Our revenue was from rents, management services and licensing fees.

Panacea Wellness in Middleborough, MA is one of MariMed’s adult use cannabis dispensaries

In 2019, we implemented a new strategic plan to consolidate these businesses. While that translates to our being structured similarly to other MSOs in that we are a vertically integrated seed to sale company, we are distinct in our operational excellence, quality product portfolio, and strong balance sheet. Other MSOs have raised large amounts of capital to pay large sums to acquire licensed state cannabis businesses and have found themselves over-leveraged and challenged to assimilate other companies’ methodologies and cultures. By consolidating the businesses and talented people we developed and managed from day one and utilizing our best practices and processes system-wide, we realize enormous capital efficiencies.

Our strategy is paying off. Our core cannabis revenue in 2020 increased 207% to $50.9 million, and our 10k reported EBITDA of $16.3 million. And now we’re on track to double our revenue in 2021.

The last piece of the puzzle is to let the world know what we’ve been doing. Slow and steady has worked for us but gone are the days of doing so quietly. We’re proud of what we’ve accomplished and exceedingly bullish on what’s to come.

Green: What do you look for in an M&A target?

Fireman: When M&A makes sense for us, we first look for single operators and entrepreneurs in states where we are not active and look to partner with business leaders that had the vision and the courage to get into this industry and build solid cannabis businesses from the ground up. I’m looking for businesses that could benefit from being part of a larger, more experienced and well-capitalized company like MariMed. Obviously, as an MSO with a solid platform, MariMed is approached regularly by other MSOs and banks suggesting candidates for M&A opportunities. Lining up with a company that has complementary cannabis licenses in other states and who shares our vision and ethics could be a win-win situation. They must embrace our commitment to diversity, the environment and proper corporate governance. We have been somewhat reticent to do this until we see some increase in our share price and market capitalization.

Green: Are there any new products, or product trends that you’re looking at?

Fireman: Marimed looks to be the most trusted source of high-quality cannabis products that consistently delivers innovative health and wellness solutions to our patients and customers. Our lab scientists are constantly creating and testing new and innovative formulations of cannabinoid compounds including CBD, THCa, CBG, CBN and others that will improve the health and wellness of our customers.

Our brand portfolio is ever-expanding with new and better product offerings. Our award-winning Betty’s Eddies Fruit Chews brand is adding new SKUs of varieties and flavors for both medical and adult use programs. Our Nature’s Heritage flower and concentrates brand is adding a line of solventless concentrates, live rosin, as well as new formulations for RSO, an oil popular with medical patients. Kalm Fusion is expanding its successful line of powdered drink mixes as we see more movement in the cannabis beverage category.

Microdosing is hugely popular right now, and we’re rolling out products in the 2-5mg dosage range. Health and dietary concerns are top of mind as well, and we offer products that are vegan, sugar-free and gluten-free. Ultimately, we want to be sure that we have something on the shelves for every single consumer. The financial hardship created by the pandemic has made consumers more attracted to value added products such as popcorn buds.

Green: You recently announced an equity financing from Hadron. I’m curious to learn more about it from a nuts-and-bolts perspective if you can share any of that information.

Fireman: Over the last year, access to the capital markets for equity raises in cannabis public companies was difficult. The cost of debt was and is still high, and we were looking for a long-term financial partner that understood the industry and could assist us. Hadron Capital has been successful for several years investing in some of the most successful MSOs and they saw the value and potential in MariMed’s experienced management and great assets.

Hadron invested $46 million in equity in MariMed this March. Approximately $16 million was utilized to retire all our short- and long-term debt but for bank secured debt and one convertible note. $7 million is committed to funding our capex and expanding the capabilities of our facilities, enabling us to grow more flower and automate production. The balance of funding will support our consolidation strategy to fund two more roll ups of state licensed cannabis businesses into the public company.

Going forward, it is comforting to have a capital partner to assist us in future acquisitions and M&A opportunities.

Green: I’d love to learn more about your Nature’s Heritage brand, particularly as it relates to the cultivation and the flower products.

Fireman: Our COO Tim Shaw has assembled a cultivation and production team with expertise in all aspects of genetics, growing methodologies, extraction techniques, and packaging innovation. That’s provided us a rich collection of quality genetics that make up Nature’s Heritage, our top-selling flower, oil and concentrate brand in Massachusetts and Maryland. We’ve recently expanded the line to include Rick Simpson Oil (RSO) and solventless concentrates (including live rosin) and have been receiving stellar feedback.

Green: What are you interested in learning more about?

Fireman: Over the last decade, the MariMed core team has seen the emergence and amazing growth of the cannabis industry. The initial medical programs in California and Colorado have now led to some form of legal medical or adult use cannabis programs in over 33 states and districts.

We are most interested in learning and following the federal, state, and international laws and regulations. It is vital to know how these laws will affect our company and the industry as a whole. When might full federal legalization become a reality? What might different versions of the law be? Will state legal programs be protected as well as the companies that took the risk in investing in the industry at its nascent state and how? What will FDA requirements and regulations look like? What medical claims will companies be allowed to make, and what kind of research or trials will be required to put a product on the shelf? What are the ramifications of the MORE Act or the SAFE Banking Act?

Responsible MSOs need to be prepared to rise to or above the standards of care of other industries. A lot of this was impossible in the past because of federal prohibition laws. Soon, if not already, labs and manufacturing processes will need to be GMP certified and more. Consumer data will need to be HIPAA compliant. Cannabis companies have to be good corporate citizens: diversity and equal opportunity should be embedded in business decisions, and commitment to ESG and sound environmental and social policies with good corporate governance need to be in planning and implemented.

Following the laws and holding ourselves to the highest possible safety and business standards will allow the cannabis industry to finally become “mainstream.”

Green: Alright, great. Thank you, Bob. That concludes the interview!

A Q&A with Matt Hawkins, Co-Founder & Managing Partner at Entourage Effect Capital

By Aaron Green
No Comments

The cannabis industry saw close to $15.5B in deals across VC, private equity, M&A and IPOs in 2020 according to PitchBook data. Early and growth stage capital has been a key enabler in deal activity as companies seek to innovate and scale, taking advantage of trends towards national legalization and consolidation. Entourage Effect Capital is one of the largest VC firms in cannabis with over $150MM deployed since its inception in 2014. Some of their notable investments include GTI, CANN, Harborside (CNQ: HBOR), Acreage Holdings, Ebbu, TerrAscend and Sunderstorm.

We spoke with Matt Hawkins, co-founder and managing partner at Entourage Effect Capital. Matt started Entourage in 2014 after exiting his previous company. He has 20+ years of private equity experience and serves on the Boards of numerous cannabis companies. Matt’s thought leadership has been on Fox Business in the past and he has also recently featured on CNBC, Bloomberg, Yahoo! Finance, Cheddar and more.

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

Matt Hawkins: We’ve been making investments in the cannabis industry since 2014. We’ve made 65 investments to date. We have a full team of investment professionals, and we invest up and down the value chain of the industry.

I had been in private equity for 25 years and I kind of just fell into the industry after I’d had an exit. I started lending to warehouse owners in Denver that were looking to refinance their mortgages out of commercial debt into private debt, which would then give them the ability to lease their facilities to growers. I realized there would be a significant opportunity to place capital in the private equity side of the cannabis business. So, I just started raising money for that project and I haven’t looked back. It’s been a great run and we’ve built a fantastic portfolio. We look forward to continuing to deploy capital up to and through legalization.

Green: Do you consider Entourage Effect Capital a VC fund or private equity firm? How do you talk about yourself?

Hawkins: In the early stages of the industry, we were more purely venture capital because there was hardly any revenue. We’re probably still considered a venture capital firm, by definition, just because of the risk factors. As the industry has matured, the investments we make are going to be larger. The reality is that the checks we write now will go to companies that have a track record of not only 12 months of revenue, but EBITDA as well. We can calculate a multiple on those, and that makes it more like lower/middle-market private equity investing.

Green: What’s your investment mandate?

Matt Hawkins, Co-Founder and Managing Partner at Entourage Effect Capital

Hawkins: From here forward our mandate is to build scale in as many verticals as we can ahead of legalization. In the early days, we were focused on giving high net worth individuals and family offices access to the industry using a very diversified approach, meaning we invested up and down the value chain. We’ll continue to do that, but now we’re going to be really laser focused on combining companies and building scale within companies to where they’re going to be more attractive for exit partners upon legalization.

Green: Are there any particular segments of the industry that you focus on whether it’s cultivation, extraction or MSOs?

Hawkins: We tend to focus on everything above cultivation. We feel like cultivation by itself is a commodity, but when vertically integrated, for example with a single-state operator or multi-state operator, that makes it intrinsically more valuable. When you look at the value chain, right after cultivation is where we start to get involved.

Green: Are you also doing investments in tech and e-commerce?

Hawkins: We’ve made some investments in supply chain, management software, ERP solutions, things like that. We’re not really focused on e-commerce with the exception of the only CBD company we are invested in.

Green: How does Entourage’s investment philosophy differ from other VC and private equity firms in cannabis?

Hawkins: We really don’t pay attention to other people’s philosophies. We have co-invested with others in the past and will continue to do so. There’s not a lot of us in the industry, so it’s good that we all work together. Until legalization occurs, or institutional capital comes into play, we’re really the only game in town. So, it behooves us all to have good working relationships.

Green: Across the states, there’s a variety of markets in various stages of development. Do you tend to prefer investing in more sophisticated markets? Say California or Colorado where they’ve been legalized for longer, or are you looking more at new growth opportunities like New York and New Jersey?

Hawkins: Historically, we’ve focused on the most populous states. California is obviously where we’ve placed a lot of bets going forward. We’ll continue to build out our portfolio in California, but we will also exploit the other large population states like New Jersey, New York, Arizona, Massachusetts, Michigan, Ohio and Illinois. All of those are big targets for us. 

Green: Do you think legalization will happen this Congress?

Hawkins: My personal opinion is that it will not happen this year. It could be the latter part of next year or the year after. I think there’s just too much wood to chop. I was encouraged to see the SAFE Banking Act reappear. I think that will hopefully encourage institutional capital to take another look at the game, especially with the NASDAQ and the New York Stock Exchange open up. So that’s a positive.

I think with the election of President Biden and with the Senate runoffs in Georgia going Democrat, the timeline to legalization has sped up, but I don’t think it’s an overnight situation. I certainly don’t think it’ll be easy to start crossing state lines immediately, either.

Green: Can you explain more about your thoughts on interstate commerce?

Hawkins: I think it’s pretty simple. The states don’t want to give up all the tax revenue that they get from their cultivation companies that are in the state. For example, if you allow Mexico and Colombia to start importing product, we can’t compete with that cost structure. States that are neighbors to California, but need to grow indoors which is more expensive, are not going to want to lose their tax revenues either. So, I just think there’s going to be a lot of butting heads at the state level.

The federal government is going to have to outline what the tax implications will be, because at the end of the day the industry is currently taxed as high as it ever will be or should be. Anything North of current tax levels will prohibit businesses from thriving further, effectively meaning not being able to tamp down the illicit market. One of the biggest goals of legalization in my opinion should be reducing the tax burden on the companies and thereby allowing them to be able to compete more directly with the illicit market, which obviously has all the benefits of reduced crime, etc.

Green: Do you foresee 280E changes coming in the future?

Hawkins: For sure. If the federal illegality veil is removed – which means there’ll be some type of rescheduling – cannabis would be removed from the 280E category. I think 280E by definition is about just illegal drugs and manufacturing and selling of that. As long as cannabis isn’t part of that, then it won’t be subject to it.

Green: What have been some of the winners in your portfolio in terms of successful exits?

Hawkins: When the CSC started allowing companies in Canada to own U.S. assets, the whole landscape changed. We were fortunate to be early investors in Acreage and companies that sold to Curaleaf and GTI before they were public. We are big investors in TerrAscend. We were early investors in Ebbu which sold to Canopy Growth. Those were huge wins for us in Fund I. We also have some interesting plays in Fund II that are on the precipice of having similar-type exits.

You read about the big ones, but at the end of the day, the ones that kind of fall under the radar – the private deals – actually have even greater multiples than what we see on some of the public M&A activity.

Green: Governor Cuomo has been hinting recently at being “very close” on a deal for opening up the cannabis market in New York. What do you think are the biggest opportunities in New York right now?

Hawkins: If it can get done, that’s great. I’m just concerned that distractions in the state house right now in New York may get in the way of progress there. But if it doesn’t, and it is able to come to fruition, then there isn’t a sector that doesn’t have a chance to thrive and thrive extremely well in the state of New York.

Green: Looking at other markets, Curaleaf recently announced a big investment in Europe. How do you look at Europe in general as an investment opportunity?

Hawkins: We have a pretty interesting play in Europe right now through a company called Relief Europe. It’s poised to be one of the first entrants to Germany. We think it could be a big win for us. But let’s face it, Europe is still a little behind, in fact, a lot behind the United States in terms of where they are as an industry. Most of the capital that we’re going to be deploying is going to be done domestically in advance of legalization.

Green: What industry trends are you seeing in the year ahead?“We’re constantly learning from other industries that are steps ahead of us to figure out how to use those lessons as we continue to invest in cannabis.”

Hawkins: Well, I think you’ll see a lot of consolidation and a lot of ramping up in advance of legalization. I think that’s going to apply in all sectors. I just don’t see a scenario wherein mom and pops or smaller players are going to be successful exit partners with some of the new capital that’s coming in. They’re going to have to get to a point where they’re either selling to somebody bigger than them right now or joining forces with companies around the same size as them and creating mass. That’s the only way you’re going to compete with companies coming in with billions of dollars to deploy.

Green: How do you see this shaking out?

Hawkins: That’s where you start to look into the crystal ball. It’s really difficult to say because I think until we get to where we truly have a national footprint of brands, which would require crossing state lines, it’s going be really difficult to tell where things go. I do know that liquor, tobacco, beer, the distribution companies, they all are standing in line. Big Pharma, big CPG, nutraceuticals, they all want access to this, too.

In some form or fashion, these bigger players will dictate how they want to go about attacking the market on their own. So, that part remains to be seen. We’ll just have to wait and see where this goes and how quickly it goes there.

Green: Are you looking at other geographies to deploy capital such as APAC or Latin America regions?

Hawkins: Not at this point. It’s not a focus at all. What recently transpired here in the elections just really makes us want to focus here and generate positive returns for investors.

Green: As cannabis goes more and more mainstream, federal legalization is maybe more likely. How do you think the institutional investor scene is evolving around that? And is it a good thing to bring in new capital to the cannabis market?

Hawkins: I don’t see a downside to it. Some people are saying that it could damage the collegial and cottage-like nature of the industry. At the end of the day, if you’ve got tens of billions of dollars that are waiting to pour into companies listed on the CSC and up-listing to the NASDAQ or New York Stock Exchange, that’s only going to increase their market caps and give them more cash to acquire other companies. The trickle-down effect of that will be so great to the industry that I just don’t know how you can look the other way and say we don’t want it. 

Green: Last question: What’s got your attention these days? What’s the thing you’re most interested in learning about?

Hawkins: We’re constantly learning about just where this industry is headed. We’re constantly learning from other industries that are steps ahead of us to figure out how to use those lessons as we continue to invest in cannabis. We all saw the correlation between cannabis and alcohol prohibition. The reality is that the industry is mature enough now where you can see similarities to industries that have gone from infancy to their adolescent years. That’s kind of where we are now and so we spend a lot of time studying industries that have been down this path before and see what lessons we can apply here.

Green: Okay, great. So that concludes the interview!

Hawkins: Thanks, Aaron.

Cannabis Revival and Year of the SPAC’s: What’s To Be Expected the Rest of 2021?

By Michael Sassano
No Comments

The unusual nature of 2020 gave rise to a reciprocally roller-coaster-like cannabis market. Cannabis was cemented officially as an essential industry with the rise of COVID-19, and November elections resulted in even more United States markets welcoming medical and adult-use sales.

The stagnant cannabis stock market of 2019 became a thing of the past by the end of 2020. Throughout the course of last year, bag holders anxiously watched cannabis options creep back up. Now, nearly two years since market decline in 2019, the cannabis stock market is exploding with blank checks and buyout fever. Much of this expectant purchasing is due to Canadian companies considering U.S. market entrance. Combined with the recent surge in the use of special purpose acquisition companies (SPACs) to invest, this has led to an increase in asset prices.

A SPAC is defined as “a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.” Though they have existed for decades, SPACs have become popular on Wall Street the last few years because they are a way for a company to go public without the associated headaches of preparing for a traditional IPO.

In a SPAC, investors interested in a specific industry pool their money together without knowledge of the company they’re starting. The SPAC then goes public as a shell company and begins acquiring other companies in the associated industry. Selling to a SPAC is usually an attractive option for owners of smaller companies built from private equity funds.

The U.S.-Canadian market questions that this rising practice asks are: Can Canadian companies enter a bigger market and be more successful? Is it advisable for U.S. companies to sell their assets to Canadian corporations whose records may be marred by a history of losses and a lack of proper corporate governance? Regardless — if both SPAC’s and Canadian bailout money is here, what comes next?

What is Driving this Bull Market?

Underpinning these movements are record cannabis sales internationally, making last year’s $15 billion dollars’ worth of sales in the U.S. look small in comparison. New markets have opened up in various states and countries throughout 2020, and that trend is only expected to continue. New demographics are opening up, especially among older age groups. This makes sense, as most cannabis sales — even in a recreational setting — are people treating something that ails them like insomnia or aches and pains.

Cannabis is set to take off, and we are entering only the second phase of its market expansion. The world is becoming competitive. Well-run companies that are profitable in key markets are prime targets for bigger, growing companies. At the same time, the world of SPACs will continue to drive valuations. Irrespective of buying assets, growing infrastructure is and will continue to be greatly needed.

The Elusive Profitability Factor

When Canada blew up, one of the biggest changes was companies began focusing the year on cost cutting and — most importantly — profitability. Profitability became the buzzword. But bigger companies are on the search for already-profitable enterprises, not just those that have the potential to be. However, profitability is currently still unobtainable in Canada. Reasonable forecasters should expect this year will show a few companies getting bailed out while many others will be forced to either merge for survival or declare bankruptcy.

An ideal company’s finances should highlight not only revenue growth, but also profitability. Attention should be focused on how well businesses are run, and not on how much money they have the potential to raise or spend. Over the years, there have been many prospective companies that spent hundreds of millions only to barely operate, and are now shells in litigation. Throwing money at any deal should have been a lesson learned in the past, but SPACs are tempting because they are trendily associated with new, interesting management styles and charismatic businesspeople.

Companies should be able to present perfect and clear financials along with maintenance logs for all equipment. In today’s day and age, books must be stellar and clean. As money pours into SPACs, asset valuations for all qualities of companies will rise. The focus instead becomes about asset plays, which will cause assets to continue rising as money is poured into SPACs.

Once upon a time, if number counters presented a negative review or had to dig too much, executives would turn a cold shoulder on investment. But in the age of SPACs, these standards of evaluation will be greatly undervalued. Aging equipment and reportability of every piece of equipment may or may not be properly serviced and recorded in a fast-moving market. Costs of repair or replacing equipment that isn’t properly maintained may be a problem of the past. Because when money comes fast, none care for the gritty details.

Issues for SPACs

Shortage of talent and training has become a big concern already in the era of SPACs. How many quality assets are out there? Big operators in the U.S. are content and don’t see Canada as an enticing market to enter. So, asset buys are likely to primarily be in the U.S. Large companies like Aphria may buy out some of the major American players, but most Canadian companies will use new funding rounds to pay down debts. Accordingly, they will then be forced to piece together smaller operators as a strategy.

A cannabis company’s personnel and office culture are very important when looking to integrate into a larger corporate culture. Remember, it’s not just the brick and mortar that is being invested into, it is also the people that run a facility. Maintaining employee retention when a deal occurs is always critical. Your personnel should be highly trained and professional if you want to exit. Easy to plug-in corporate structures make all the difference in immediately gaining from the sale or having to retool the shed and bring in all new people.

The rise of the SPAC-era and Canadian entry into the U.S. market will cause asset increases, but it is only the second chapter in the market expansion of cannabis. Proper buys will nail profitability, impeccable books, proper maintenance records and will have created an efficient corporate structure with talented personnel. The rest will be overpriced land buys that will require massive infrastructure spending. The basics of a well-run organization don’t change. The cannabis market is going to ROAR, but don’t worry if the SPACs pass you by- they are buying at the start of cannabis only.

GW logo-2

Jazz Pharmaceuticals to Acquire GW Pharma

By Cannabis Industry Journal Staff
No Comments
GW logo-2

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

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

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

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

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

Hardware Platforms in Cannabis: A Q&A with Mike McDonald, President and CEO of Ammonite

By Aaron Green
No Comments

More and more we are seeing the development of proprietary hardware platforms in cannabis. With proprietary technology in hand, manufacturers often lean on MSOs, LPs and other brand partners to grow their business through existing sales channels.

We spoke with Mike McDonald, President and CEO at Ammonite, to learn more about the history of the Dablicator™ platform and Ammonite’s North American brand partner strategy. Mike formed Ammonite as a spin-off company from Jetty Extracts after getting to know the founders in a real estate transaction. Prior to Ammonite, Mike was an operator in the manufacturing and product development space, having helped to launch the Giant bicycle brand as well as growing and eventually selling the Atlas Snowshoe Company to K2 Sports.

Aaron: How did you get involved in cannabis?

Mike: Well, like a lot of folks in the industry, my background is pretty eclectic. I come primarily from an operator’s perspective – I’ve been in manufacturing, product development and company growth for my whole career. I lived in Taiwan for several years and helped to launch the Giant bicycle brand worldwide. I was also involved with a ski business that was started at Stanford as a thesis project called Atlas Snowshoe Company. Fast-forward, we built it into the largest snowshoe brand and activity in the US and later sold it to K2 Sports. So, I’ve always been involved in the growth of product-related businesses.

Mike McDonald, President and CEO at Ammonite

I’ve also done some real estate development as well; I actually sold our building to the Jetty guys, which is how we met. In that process, I got involved with their company, helped Jetty reorganize its business model, raise some money, and then just got addicted to the whole industry and really found it fascinating. I liked the team at Jetty and couldn’t resist jumping in, and now I’ve been full-time in the business for over three years.

Aaron: How did you get involved in Ammonite?

Mike: Ammonite is actually a spin out company from Jetty Extracts, which is one of the largest brands in California. Our main Ammonite product is called the Dablicator™ Oil Applicator, which was originally invented at Jetty as a medical device for cancer patients. We saw a big demand for it as a private label partnership product, so we decided to spin out a separate hardware company and really focus on developing unique IP and CBD and cannabis related hardware.

Aaron: What trends are you following in the industry?

Mike: Certainly the MSOs of the world are really expanding and the top three to five are making a mark with growth and more sophistication in the market. I think the social equity movement is really a big component that we’re all excited about in the industry. You’re seeing the larger players really put their money where their mouth is around that. We’ve always been a big part of that in California.

Specifically, regarding trends in the cannabis space, Colorado and California are probably the two most mature markets. We generally say what’s happening in California and Colorado eventually make their way out to the rest of the world. Vaping was invented in California and Colorado, and now it’s a huge part of the business where before, four or five years ago, the market was mostly flower-centric.

There’s a trend away from inhalables, with more awareness around lung-related illnesses and of course COVID, so we’re seeing a big growth in edibles, drinks and so forth. Interestingly enough, although it’s an inhalable, infused pre-rolls are a big growth sector as well. Jetty is actually launching an infused pre-roll program in February.

Folks are looking for ways to get their medicine without smoking – and this has definitely led to a growth in the oil application business. Oil application has traditionally been delivered via a syringe. Dablicator™ oil applicator is essentially an improved, more convenient syringe. On the medical side, patients have been taking oil sublingually, putting it in food and drink and so forth for years because a lot of them can’t smoke. As that trend transfers over to the adult use market, oil application is becoming really big. You can take it sublingually; you can put it in your food or beverage. On the recreational side, you can add it to your loose flower or joints, or of course, dab it directly onto your rig via the heat resistant tip.

Further, you’re probably familiar with a lot of these portable dab rigs that are taking off, like the G Pen Roam and the Puffco Peak and a variety of others. So now you can dab on the go with your standard wax and shatter in a jar. It’s just not the most convenient way if you’re up on a hike or on a mountain bike ride. So now, with a portable dab rig and something like the Dablicator™ oil applicator, you can have a really convenient mess-free way to enjoy cannabis. The big growth in concentrates and areas that aren’t necessarily inhalables is where our product hardware really fits in.

Aaron: How did you come up with the idea for the Dablicator?

Mike: The Jetty team had a friend that had brain cancer. He was doing a lot of chemotherapy and was having trouble eating and keeping weight on and he couldn’t smoke. So, the guys at Jetty began to bring him cannabis oil, which he was able to use ingesting it from a spoon initially and it really helped him with his pain, his anxiety and his appetite. In that process, we realized that there wasn’t really a great way to deliver oil. Syringes were there, but they were kind of sketchy and they weren’t convenient.

So, the Jetty team developed a better mousetrap. Several iterations later, this Dablicator™ product was ready for patients. In fact, it became a big part of the Jetty Shelter Project, a non-profit where the team delivers cannabis to cancer patients, and it was a very much sought-after product delivery device in that world. So, it was developed inside of a need on the medical side and it’s really sort of grown inside the expansion on the adult-use side.

Aaron: Can you explain how the Dablicator™ oil applicator works from a perspective of form and function?

Mike: Pre-Dablicator™ you would use a syringe type product – for direct oil application, sublingual application, or as an add on to your flower. The difference between Dablicator™ oil applicator and a traditional syringe is that Dablicator™ is a twist and plunge product. Imagine a pen filled with oil, but instead of inhaling it, you’re able to dispense it through a tip that is heat resistant, which means you can apply directly to your dab rig nail. You’re able to put it in your pocket without fear of cannabis oil leakage. It’s discreet, precise, compact and portable.

Aaron: How does the user dose using Dablicator™ oil applicator?

Mike: Basically, there’s measurements on the plunger of 55 milligrams apiece – one click is 55 milligrams, and you can dispense as many clicks as you like. What’s cool about the product itself is if you’ve clicked too many times accidentally, you can back it off and the excess oil won’t dispense. You can go to dablicator.com and see demo videos as well.

Aaron: Dablicator™ oil applicator started as a Jetty Extracts spin-off. I see you are now white labeling for other oil brands. How do you go about selecting your partners?

Mike: We call it our brand partner program. It’s not too dissimilar to what other hardware manufacturers, like PAX and GPen, are doing. We’ve got a patented and innovative device where our brand partners, MSOs and leading brands throughout the US and Canada, can take their existing vape and tincture oils and offer them in Dablicator™ oil applicator hardware.

Our focus is signing up major, well respected brands and MSOs on to the “platform,” meaning they are able to immediately offer between six and ten new SKUs to their consumers. They take their existing oils, put them into a custom branded Dablicator™ hardware unit and add their custom branded packaging. It’s a full turnkey solution. For example, one of our partners, 710 Labs, is developing their RSO and were shopping for a delivery method specifically geared towards medical patients. Within eight weeks, we had a custom program for them and delivered hardware, and we assisted on the packaging front as well.

Our partners have to be reputable folks that are interested in developing or delivering oil in a unique and innovative way. Frankly, our early partners are those that see where the growth is. 710 Labs is on the platform, as well as Surterra in Florida, Ancient Roots in Ohio, and we’ve got multiple conversations going to some of the other MOSs and the LPs in Canada.

Aaron: Are the brand partners loading the oil applicator themselves?

Mike: We customize the product for them and then ship them unassembled and empty. In their lab, they use the same machinery and equipment they use to fill their vape cartridges. They then fill their Dablicator™, assemble it, package it and ship it out just like any other product that they’re processing and manufacturing.

Aaron: What kind of oils are suitable for Dablicator™?

Mike: Pretty much any oil that’s going into a vape cart is suitable and then some. Some of our customers, including Jetty, started out with a THC distillate. Live resin is becoming a big product category in California as well as solventless oils. Dablicator™ oil applicator can accommodate everything from distillate to live resin to solventless to RSO and even full spectrum CBD. If it can flow, if it doesn’t crystallize up like shatter and sugars and diamonds, you can put it into Dablicator™, even the thickest of oils. It’s designed to contain any kind of liquids that are flammable.

Aaron: What geographies are you currently in?

Mike: We’re in multiple states throughout the US and actually just signed up with an LP in Canada. We only launched the program in August of 2020, and today we’ve got partners California, Colorado, Ohio, Arizona, Missouri, Florida, soon to be Michigan, Illinois, and throughout Canada.

Aaron: Any plans for international expansion beyond North America?

Mike: We’re getting inquiries on a regular basis from all over the place, including internationally. We’re in conversations with some folks down in Brazil. Spain is actually a big cannabis market and we’re having some conversations with some folks there. The inquiries are coming in faster than we can process the relationships, but right now our major focus is on North America.

Aaron: What are your goals with Ammonite?

Mike: We are developing a category, right? So today, oil dispensing isn’t top of mind. Today, if you want oil, you go into a dispensary and say, “Hey, give me those syringes.” My goal is that a year from now, you can walk into Harborside in Oakland and you see a wall of different branded Dablicator™ oil applicators. The goal is to really turn the oil dispensing business into a category, and then position Dablicator™ oil applicator as the best and leading product in that category.

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

Mike: Well, I’ve got two teenagers – two daughters, as a matter of fact, a freshman and a senior – and they’re being homeschooled right now. So that’s been quite an interesting development!

I think on the cannabis side, it’s just fascinating what it is as a business model. It’s the most recent multi-billion-dollar opportunity in consumer products. You only get a chance to participate in something like that maybe once in a lifetime. I’m really looking forward to seeing it become more adopted into the mainstream and it’s already becoming that way from a consumer perspective. I am watching the cannabis market become legal from a federal perspective, hoping that the social equity component of the industry really stays with it.

I’ve been in a lot of businesses over the years; I feel like one of the gray hairs in this business that is actually an operator versus someone who came over from the financial side. I am continuing to learn, grow and work with great people and this has been a really amazing experience for me.

Aaron: Okay, great. Mike, that’s the end of the interview. Thank you for your time today!

Canadian Lab Offers Vapor/Smoke Analysis

By Cannabis Industry Journal Staff
No Comments

According to a press release sent out last week, Complex Biotech Discovery Ventures (CBDV) has expanded their testing capabilities considerably with the new addition of a vapor/smoke analyzer. CBDV is a licensed cannabis and psilocybin research laboratory embedded in the University of British Columbia, led by CEO Dr. Markus Roggen.

Dr. Markus Roggen, Founder of Complex Biotech Discovery Ventures (CBDV)

The ability to analyze vapor and smoke is a relatively novel concept for the cannabis space, but has been utilized by the tobacco industry for years now. In the early days of adult-use cannabis legalization in the United States, stringent testing regulations for contaminants like pesticides were adopted out of a fear for what would happen when consumers ingest toxic levels of contaminants.

One of the common refrains iterated throughout the industry over the past ten years was that there just wasn’t enough research on how different contaminants affect patients and consumers when burned and inhaled. We still don’t know too much about what happens when someone smokes a dangerous pesticide, such as myclobutanil. Beyond just contaminants, the new technology allows for companies to measure precise levels of cannabinoids in vapor and smoke, getting a more accurate reading on what cannabinoids are actually making it to the end user.

The smoke analyzer at CBDV

This new development coming from our neighbor to the north could lead to a breakthrough in the cannabis lab testing and research space. CBDV claims they can now analyze cannabis material with a much more in-depth analysis than basic compliance testing labs. The new technology for analysis of smoke, vapor, plant material and formulations allows companies to thoroughly understand their materials in each stage of the product formulation process, all the way to product consumption.

Beyond just smoke and vapor analysis CBDV also offers NMR spectroscopy, metabolomics, nanoparticle characterization, computational modeling and other testing services that go far beyond the traditional compliance testing gamut.

“Our new services offer comprehensive insights into plant material, extracts, end-products and even the smoke/vapor by using state-of-the-art analytical instruments,” says Dr. Roggen. “By understanding the chemical fingerprint of the material, cannabis producers can eliminate impurities, adjust potencies, and optimize extraction processes before wasting money and resources on producing inconsistent end products. As a chemist I am really excited about adding NMR and high-res mass spectroscopy to the cannabis testing offerings.”

Cresco Labs Acquires Bluma Wellness

By Cannabis Industry Journal Staff
No Comments

Cresco Labs, one of the largest multistate operators (MSOs) in the country, announced the acquisition of Bluma Wellness Inc., a vertically integrated cannabis company based in Florida.

Cresco Labs, with roots in Chicago, Illinois, operate 29 licenses in 6 states across the United States. With this new acquisition, Cresco Labs solidifies their ubiquitous brand presence in the most populous markets and cements their position in Florida, a new market for them.

According to the press release, the two companies entered an agreement where Cresco will buy all of Bluma’s issued and outstanding shares for an equity value of $213 million. They expect the transaction to be completed by the second quarter of this year.

Charles Bachtell, CEO of Cresco Labs, says their expansion strategy is based largely on population. “Our strategy at Cresco Labs is to build the most strategic geographic footprint possible and achieve material market positions in each of our states,” says Bachtell. “With Florida, we will have a meaningful presence in all 7 of the 10 most populated states in the country with cannabis programs – an incredibly strategic and valuable footprint by any definition. We recognize the importance of the Florida market and the importance of entering Florida in a thoughtful way – we identified Bluma as having the right tools and key advantages for growth.”

Bluma Wellness operates through its subsidiary, One Plant Florida, which has 7 dispensaries across the state and ranks second in sales in the state. They also have an impressive delivery arm of their retail business, deriving 15% of their revenue from it.

The Cannabis Industry and Tax Implications of Entity Structure: Issues to Consider

By Calvin Shannon
2 Comments

This piece is intended to provide some considerations that current and potential license holders should think about as they work with advisors to make entity selection decisions or consider potential tax elections. Please note that this article is a high-level overview and is not intended to declare the best type of entity structure for a license holding entity. Although there are numerous tax variables that should be contemplated, tax issues are not the only concerns relevant to determining entity type. In addition, some states may tax entities differently than how the entity is taxed for federal purposes.

First, let’s look at the legal entity types that may be set up to hold a license, operate a business and what that may mean for how an entity is taxed. Often, entities are set up as either limited liability companies or corporations.

If a limited liability company is organized and the entity is owned by only one owner, a single member LLC, the default tax treatment would be that the entity is disregarded for tax purposes. In other words, it would not file a separate federal income tax return, except in some states including CA, TX, TN and RI. All the tax consequences of the activities within the legal entity are reported on the tax return of the owner of the entity.

If a limited liability company is set up and the entity is owned by more than one owner, a multiple member LLC, the default tax treatment would be that the entity is taxed as a partnership. An entity taxed as a partnership reflects the tax consequences of the activities within the legal entity on a partnership return. The partnership generally does not pay tax on the activity, but rather the taxable income and loss are passed through to the owners of the LLC. The owners of the LLC reflect the taxable income or loss on their tax return and are responsible for paying any resulting tax. In the rare instance of an entity being audited, there is a possibility that the entity may have to pay tax on the partners behalf, depending on the ownership structure. Either a single member LLC or a multiple member LLC may elect to treat the LLC as a C-corporation or an S-corporation for tax purposes.

The Taxation of C-Corporations & S-Corporations

The default treatment for an entity set-up as a corporation is the entity will be taxed as a C-corporation. An entity taxed as a C-corporation, including an LLC electing to be taxed as a C-corporation, pays the tax on any taxable income generated by activities within the entity.  Additionally, any distributions of earnings from the C-corporation to the owners of the entity are generally considered dividends which are required to be reported as taxable income by the owners when received. In other words, the earnings of an entity taxed as a C-corporation are potentially taxed twice. Once, as they are earned within the entity, and then again upon distribution to the owners of the entity.

An entity set-up as a corporation, a single member LLC or a multiple member LLC may elect to be treated as an S-corporation. Like an entity taxed as a partnership, an S-corporation does not pay tax at the entity level, but rather passes the taxable income and loss through to the owner or owners. Additionally, like a partnership, distributions from an S-corporation are not taxable as dividends to the owner when received.

Since we covered how different entities are taxed based on how they are set-up, and what elections they may or may not make, we will explore some of the issues that should be considered when making an entity selection. We will also address potentially electing to treat an entity one way or another for tax purposes. 

S-Corporations 

Advantages: The advantages of an S-corporation are limited to the avoidance of double taxation associated with C-corporations, as well as some potential benefits of lower Social Security and Medicare taxes.

Disadvantages: The primary disadvantage of an S-corporation for a license holding company is any non-deductible expenses resulting from 280E are passed through to the owner(s), which then reduces the ownership’s tax basis in its investment in the entity. A reduction in tax basis is determinantal to owners of an entity because the basis is used to reduce taxable income when/if the owner liquidates ownership in the entity.

Other disadvantages of S-corporations include but are not limited to restrictions on ownership of the entity, a requirement for reasonable compensation paid to owners and a lack of flexibility in the allocations of earnings among owners.

Partnerships

Advantages: The advantages of a partnership include but are not limited to the avoidance of double taxation associated with C-corporations, flexibility in the allocation of earnings and losses among owners, and flexibility in the type of owners of the entity.

Disadvantages: Like S-corporations, the primary disadvantage of a partnership is any non-deductible expenses resulting from 280E are passed through to the owner(s).

Other disadvantages of partnerships include potential self-employment taxes on earnings allocated to active owners, potential complexity in the allocations of taxable income and losses among partners in entities with many owners or different classes of ownership.

C-Corporations

Advantages: In contrast to S-corporations and partnerships, the tax basis resulting from the ownership’s investment in the entity is not subject to reductions from non-deductible expenses being passed through to owners. This protection of tax basis is particularly important to owners of license holding entities.

An additional advantage of C-corporation tax treatment may be a lower tax rate applied to taxable income.

Disadvantages: The most significant disadvantage of C-corporation tax treatment is the potential double taxation of earnings that might be applicable if the entity does have earnings that are distributed.

In addition to the items address above, the advantages and disadvantages of the entity type and related tax elections, additional considerations include:

  1. How much of the 280E nondeductible expenses will the taxpayer be subject to?
  2. How much earnings will the entity be distributing to the owners?
  3. How complex is the entity’s ownership?
  4. The lack of certainty regarding whether or not the qualified business income deduction (QBID) enjoyed by pass-through entity owners is allowable as a deduction by owners receiving pass-through income from an entity subject to 280E.
  5. Are there plans for selling the entity and if so, what is the time horizon for doing so?

At Bridge West, we advise taxpayers to consult with cannabis advisors who have experience in the industry, can help navigate the complexities of tax compliance and Code Section 280E and are experienced with entity structures.