After a slow start following a disappointing 2019, M&A in the cannabis space closed 2020 with a bang, with more than $600 million in deals announced immediately following the November elections. Prospects for the New Year are expected to continue the explosive year-end trend with a backlog of nearly $2 billion in deals heading into 2021. The COVID-19 pandemic boosted sales of cannabis products, and election results opening up five new states to legal cannabis use and possible federal regulatory reform are further boosting prospects. Analysts now predict the U.S. cannabis market is poised to double by 2025.
Growth is expected to be led by multi-state operators who have achieved scale, cleaned up their balance sheets and stockpiled dry powder for roll-up acquisitions. Cannabis companies raised nearly $134 million in the two weeks before Election Day, a 185% increase over the same period last year. Most of the money flowed to multistate operators. In addition, the biggest stocks by market capitalization saw a roughly 20% bump ahead of the election and now are trading at record volumes, providing plenty of stock currency for further acquisitions.
Among the headline acquisitions last year:
Curaleaf continued its multi-state expansion with two of its largest acquisitions – the all-stock purchases of its affiliated cannabis oil company Select and of Grassroot, another MSO player. Curaleaf is now the largest cannabis company in the world based on annualized revenues, with annualized sales of $1 billion and operations in 23 states and 96 open dispensaries. Curaleaf also raised $215 million privately last year end for further expansion.
Close behind, Aphria and Tilray announced in December that they will merge, creating what they say will be the largest cannabis company in the world with an equity value of roughly $3.8 billion. The combined entity will have facilities and offices in the U.S., Canada, Portugal and Germany. The deal is expected to close during the second quarter of this year.
Also in December, Illinois-based Verano Holdings LLC unveiled plans to go public at a $2.8 billion valuation through a reverse takeover of a Canadian shell company. That deal followed the announcement that Verano will merge with Florida-based AltMed.
In addition, publicly traded New York cannabis firm Columbia Care signed a definitive agreement last month to acquire Green Leaf Medical, a privately held Maryland-based cannabis manufacturer and retailer, for $45 million in cash and $195 million in stock. The acquisition is expected to close this summer. Including Green Leaf’s inventory, the Columbia Care will operate 107 facilities, including 80 dispensaries and 27 cultivation and manufacturing facilities. Columbia Care also took advantage of cannabis fever last year by raising $100 million privately.
Also in December, Ayr Strategies announced it would acquire Liberty Health Sciences, one of the largest cannabis companies in Florida, for $290 million in stock, as well Garden State Dispensary, a New Jersey marijuana company for $41 million in cash, $30 million in stock and $30 million in the form of a note. This follows Ayr’s $81 million acquisition of an Arizona medical marijuana operator in November. Voters approved marijuana use in Arizona and New Jersey in November. Ayr has completed a string of acquisitions in Nevada, Massachusetts, Pennsylvania, Arizona, Ohio and, upon the closing of December’s deals, New Jersey and Florida.
Not all cannabis companies will rely on acquisitions, however. Trulieve, as an example, has focused its efforts on Florida and organic growth. It remains to be seen whether a multi-state approach fueled by acquisitions or a single-state organic growth model will prove the more lasting. Growth and profitability in the short term likely will continue to be hampered by limits on economies of scale due to federal restrictions and differing state laws.
In light of the maturing industry and the 2019 bust, the valuation model for acquisitions in the cannabis space is evolving from one based on sales, typically associated with emerging growth industries, to a more mature industry model based on profits or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Most cannabis MSOs have stabilized and generate positive EBITDA, which justifies the evolution away from a sales-driven model.
From a legal standpoint, the same limitations that have vexed the cannabis industry for years will continue to challenge deal makers until there is greater clarity on the federal front. Institutional investor reluctance, financial industry constraints, haphazard state regulation and the unavailability of federal forums such as national copyright and trademark registration will continue to be issues for acquirers and their lawyers in the space.
Acquisition agreements will continue to have to address the federal Damocles’ sword should expected relaxation of federal enforcement under the Biden administration and further legislative relief does not materialize as expected. Although the U.S. House in December passed the “Marijuana Opportunity Reinvestment and Expungement Act” (MORE) to remove cannabis from the Controlled Substances Act, the Senate did not take up the bill in 2020 and it will have to be re-introduced in 2021. Notably, the MORE Act does not affect existing federal regulation of cannabis, such as the Food, Drug and Cosmetics Act, under which the FDA has limited the use of CBD in certain products despite hemp being removed from the Controlled Substances Act in 2018.
The cannabis M&A market is moving into a more mature phase, as MSOs will be choosier in their approach rather than continuing the land-grab mentality of years past. Due to improved financial strength, 2021 should see these MSOs continuing to expand their footprints either within existing states or new ones. Although uncertainties abound, further consolidation and expansion through add-on acquisitions is likely to continue apace in 2021, providing plenty of opportunities for deal makers and their lawyers.
Natural cannabinoid distillates and isolates are hydrophobic oils and solids, meaning that they do not mix well with water. By formulating these ingredients using various technologies, companies like Caliper and Ripple have learned how to change the solubility properties of the cannabinoids. In addition, formulations can improve bioavailability and onset time of the cannabinoids.
Stillwater Brands is a cannabis formulation company based out of Denver, Colorado, leveraging proprietary technologies for solubilizing cannabinoids in water. Stillwater has a partnership with the Canadian company Green Organic Dutchman and will soon expand their THC line of products, Ripple, into Michigan. Their CBD product line, Caliper, is already sold nationally.
We spoke with Drew Hathaway, senior food scientist at Stillwater, about the Stillwater technology and aspirations for growth. Hathaway joined Stillwater in 2018 after engaging with them as a technical sales representative in his previous role at a food ingredients supplier.
Aaron Green: What trends are you following in the industry?
Drew Hathaway: I can mainly speak to the science side of the business since that’s where I operate, but I do have some insight into the marketing approach and some of the things we look at. We’re looking at traditional food and beverage trends, whether it’s beverage formats, with its unique ingredients that are going to be general flavor trends, which can definitely be very region-specific. One of the things we definitely look at, especially on the THC side, is dosage differences. What are people putting their dosages at? Are they doing a combination of cannabinoids or terpenes? Are they really using individual ingredients? I think that’s something that’s been fairly well established in the THC market, especially since you have the regulatory mandate of 10 milligrams THC being your max single dose.
Drew Hathaway, senior food scientist at Stillwater
When Stillwater first launched in 2016, our company started with lower dose products to provide microdose options. We focus all of our products on functional foods for consumers. It’s why we have three different options for every single one of our products. We have what we call the Pure 10 which is 10 milligrams of THC per serving. We have what we call the Balanced 5. That’s 5 milligrams THC, 5 milligrams of CBD. Then as well as our Ripple Relief, which is a 40 to one ratio of CBD to THC at 20 milligrams CBD and 0.5 milligrams THC. We provide a variety of options for people looking for different dosage levels. We have to look at all of those trends. Packaging trends are also high on our radar.
Aaron: How about flavors?
Drew: We recently launched additional SKUs for our Ripple gummies here in Colorado. We have four different options. We have a sour variety pack that contains sour watermelon, sour apple and sour peach. We also just launched peach cherry, kiwi apple and sour watermelon by itself — and all of those are at the five milligram THC per gummy dose. That aligns with the Pure 10 line as well. We also have been working on some new flavors for the 10 milligram THC quicksticks, which we’re looking to launch early next year. Then, like I mentioned earlier, we’re expanding into Michigan with the THC business, which has been a big goal for us and something that’s gotten a lot of effort behind the scenes.
Aaron: So Drew, how did you get involved at Stillwater?
Drew: I like to describe myself as a traditionally educated food scientist. I went to college and got my bachelor’s and master’s in food science and technology at Ohio State. And then I ended up at a really cool company that was a very large food ingredient supplier. I was technical support to sales for their team. Through that position, I covered the Colorado territory as well as California and I got to cover Stillwater as one of my customers providing technical advice on different products and ingredients that they were looking at. I got involved with Stillwater through that position, back in the early days when they were still trying to develop and figure things out. That would have probably been about four years ago. I was able to see from the sidelines and I was dealing with some other cannabis companies in the space here in Colorado at the time too.
I recognized very early on what they were trying to do by making cannabinoids water soluble and water compatible. It was not only extremely challenging, but also had a ton of potential if they were able to pull it off. At that point, they were still trying to figure out how this is going to work. How do we produce it? How do we sell it? How do we make sure that things are stable? Things of that nature. I got an inside look at Stillwater from the very start, back when there were really only a few people at the company. I would check in with them regularly as they needed help.
I always joked that they were my least important, most interesting customer and I mean that only because they were buying extremely small amounts of ingredients from us. From a sales perspective, naturally, my manager didn’t necessarily want me spending a ton of time working with them. From a personal interest perspective, I was like, “these guys are doing something really intriguing and if they can pull this off this has a ton of potential, so I want to help them however I can.”
I dealt with them in that sales capacity for about two years before they talked about expanding into the CBD space with the Farm Bill passing at the end of 2018. I recognized at that point that I think they had two scientists including Keith, our head of R&D, and I said “alright, that’s really ambitious. You probably need some help! I think it’s time for me to take the leap and see if you guys are interested in having me come on board.” Fortunately, they were and so I’ve been with the company a little over two years now.
Aaron: Can you explain at a high level what the Stillwater products do?
Drew: The base technology behind all of our products for Ripple and Caliper is essentially converting your fat-soluble cannabinoids, whether it’s CBD or THC, into a water compatible product in a process referred to as emulsification. What you’re essentially doing is taking CBD and THC containing oils, whether it’s a distillate or isolate, and you’re essentially breaking those fat droplets into extremely small droplets and then stabilizing them at that size. We make our own emulsion — the fat droplets are extremely small — then when you draw that down into a powder format and redissolve it into water, you are dispersing billions upon millions of fat droplets into your glass. Those droplets are evenly dispersed through the beverage so that you get the same amount of THC or CBD in your first sip that you get in the last sip. That’s really the core technology behind everything that we do.
Taking cannabinoids and making them water soluble is the base technology necessary in order to make something like a shelf-stable infused beverage. There’s no way that you’re going to take traditional distillates or cannabinoids and be able to make a beverage that is shelf-stable otherwise. It’s been really cool since joining Stillwater to learn and understand how that process changes the way that those cannabinoids are absorbed by your body. Emulsification changes things like the onset time, as well as the total amount of cannabinoids your body’s absorbing and using. That’s been something that’s super interesting to see through the clinical research that we’ve done with human participants through Colorado State University.
Aaron: Let’s say if you just take THC oil and put it into an infused product. What’s the difference between that and Ripple?
Drew: Some products formats, such as beverages, just aren’t possible with THC oil without an emulsification technology. As the old saying goes in science, water and oil just don’t mix. So, if you were to take a traditional THC distillate and try to add it to a beverage, that would just float on top as a big oil slick. When you took your first sip, you would essentially get all of the cannabinoids in your first gulp which not only makes precise or partial dosing impossible, but also would taste absolutely terrible. Emulsification makes those infused beverage products possible and stable over a normal one-year shelf life or potentially longer.
Emulsification also changes the way that your body absorbs those cannabinoids, which is something that we’ve definitely put a heavy emphasis on and have really been able to validate with clinical research. I think that’s one of our biggest differentiators versus our competitors. We’re definitely not the only ones in the water-soluble cannabinoid space, but from my understanding, I think we’re one of the few companies that have actually executed human-based clinical trials (vs rodents) through a third-party university and been able to prove that these cannabinoids are detected in your bloodstream as fast as 10 minutes after consumption. We measured those results directly against an oil-based control, where you’re not going to get a peak absorption until maybe 60 to 90 minutes after consumption. What this research found was that not only was our product absorbed much faster, but it also enabled a significantly higher amount of the cannabinoids to actually make it into the participants’ blood stream where it can be used by their bodies. We also found the type of food emulsifier makes a significant difference in absorption – not just emulsion size, counter to common belief.
We use the analogy, “It’s getting a better bang for your buck.” The main purchasing consideration for a lot of edibles consumers when you go to a dispensary is “what is my cost per 10 milligram dose of THC?” That’s one of their key purchasing parameters, especially for your lower budget customer. What’s great with Ripple is one milligram of THC consumed through our Ripple technology is not really equivalent to one milligram of an oil-based product and that your body is actually going to absorb a higher percentage of it. And therefore, you’re going to get more of an effect, whether you’re looking for a medical effect or whether you’re looking for more of a recreational therapeutic effect. It also improves the consistency of that experience. So, with oil-based products, you could have the same products multiple different times and based on what you recently ate, you might get a higher or lower absorption rate or a faster or slower absorption rate. It’s also in the consistency of the experience and I know that from our market research of our consumers of Ripple products here in Colorado since that’s been in the market for a few years now. That’s the number one reason why people really trust our brand is because they can count on getting a consistent experience every time for the same dose.
As we all know, with the THC market and edibles market being newer in general, that’s most people’s biggest fear, especially if you’re a new consumer of THC — you obviously don’t want to consume more than what you can handle as far as getting higher than you want to be or anything like that — So consistency is a really, really key aspect for us and something that I’m definitely proud that we can provide that for our consumers.
Aaron: What does your product look like when you dissolve it into a liquid – let’s say something clear? Is the resulting mixture clear or cloudy?
Drew: We do have liquid concentrates, especially in the Caliper side of things, but with our powders, it kind of billows in as a cloud when you add it to a clear liquid. You can almost think of it like when we pour creamer into coffee: you see the cloud expand and then slowly fill out the cup and then be fully mixed in. Whereas with our products if you pour it into clear water, and you’ll see this white cloud form and then disperse. The final solution is generally a little bit cloudy depending on how much water you add it to.“I’ve been fortunate to be the lead developer for those products for Caliper and for Ripple, and flavor work is definitely something that never gets old.”
Aaron: How are customers using your products?
Drew: For a long time, we’ve had a variety of products in the market, some of which are still in the market, and some of which we’ve pulled since then. The key product for us has always been the Ripple dissolvable powder. It’s an unflavored, unsweetened powder that comes in a little sachet packet that you can tear open just like you would any other product and add to really anything. With its water compatibility, there’s really not a single product that you can’t add it to. It’s been really cool to see through social media, and in general, consumer engagement is electric and is kind of viewed as a novelty. The initial reaction is “Oh, I can take this little powder, put it in my eggs and now I have infused eggs!” It’s been great to see the creativity that our consumers have. We’ve seen it put in such a wide variety of products that literally you can make anything into an edible. I think that’s one of the coolest aspects of that product and why it’s been so successful.
One of the things we did realize pretty fast is that for a lot of people, the convenience and the consistency of the experience was a main driver for why they were purchasing our products. A lot of our real consumers just take that packet apart, ripping it open and pouring it straight in their mouth. It’s the fastest and most convenient way to consume the products, pretty much anywhere. We dug into that with our more recent launch of Ripple Quicksticks. And then we added some flavor, we added a little bit of sugar and sweeteners to make it a consumer-friendly experience where you get a really enjoyable flavor. It’s still just as convenient to consume by just ripping the packet straight open and pouring it in your mouth.
Aaron: It sounds like there must have been some interesting internal product development testing!
Drew: Yeah, definitely. That’s a fun one. I’ve been fortunate to be the lead developer for those products for Caliper and for Ripple, and flavor work is definitely something that never gets old. It can be frustrating at times, it’s definitely not the easiest thing to do. We’ve looked at traditional berry flavors, citrus flavors, as well as weird, kind of out-there flavors, to see what we like and what we think will work with our consumers.
Aaron: What states do you operate in?
Drew: Currently, our Stillwater THC business only operates in Colorado. That’s essentially the genesis of all the companies (Ripple, Caliper) is Stillwater being here in Colorado. We’re excited to announce that we’re expanding to Michigan next year. That’s something that we’ve all been working pretty heavily on developing and getting ready to go. That will be our first expansion of the THC brand to a different state.
We do have a licensing and distribution agreement with The Green Organic Dutchman (TGOD) in Canada. They produce our products using the same technology up there and license also under the Ripple brand name. So, it’s great to see the presence that we’ve been able to expand up there.
Then with Caliper on the CBD side of things with Caliper Ingredients and Caliper Consumer. We operate nationwide for that based on the more recent rules with the 2018 Farm Bill. For me, especially working across all of those business units, it’s really interesting to see the different business approach between your target CBD consumers and your target THC consumers because they’re really different markets. There’s definitely some overlap, but you’re targeting a different demographic to a certain degree. We keep those decisions in mind when we’re choosing how to market and what flavors to use and what products to make. So that’s been really interesting for me to see the behind-the-scenes discussions.
Aaron: I saw on your website, you’ve got consumer options via the dispensaries. Do you work with any infused product manufacturers on a licensing basis or partnership basis?“I’m super excited to continue to see how the medical research will continue to evolve.”
Drew: I’d say the majority of them are definitely on the CBD side for Caliper, partly because the regulatory environment of CBD just is a little bit easier to kind of engage other customers and to sell products across state lines and things of that nature. We do have some partnerships with some of the companies here in Colorado. I’d say the main one that we’ve promoted externally is with Oh Hi infused Seltzers based out of Durango, Colorado. It’s been a great agreement where we provide our base technology via liquid Ripple formulation that they can then infuse into their seltzers. They’ve done a great job with those products and it’s definitely a partnership that’s been mutually beneficial.
Aaron: What are you personally interested in learning more about?
Drew: For me, the whole appeal of joining the industry was research. With prohibition and decades of those restrictions preventing true research there are so many unknown questions that still need to be investigated. I’m super excited to continue to see how the medical research will continue to evolve. I think we’ll get better clarity on the efficacy of individual cannabinoids versus different combinations and ratios of cannabinoids. The entourage effect is something that’s pretty heavily talked about in the industry. I do think there’s some research to support that. I also think there’s still way more unknowns than things that we actually know. So, I’m super interested in seeing how our understanding of everything will continue to improve over time.
I’d love to see the medical research eventually expand into what synergistic benefits exist between cannabinoids and other bioactive ingredients such as turmeric, catechins, antioxidants and other plant-based ingredients that have gotten a lot more interest through the medical research in the last decade.
Then one of the things I’m always excited about being on the science side of things is we’re still investigating the general compatibility of cannabinoids with various types of food and beverage products. That goes not only for ingredient interactions, but also factors like pH, water activity and moisture content. Even packaging definitely plays a role in cannabinoid stability for a variety of products. There’s also a variety of production processing technologies that still need additional investigation, whether you’re talking pasteurization, for beverages, or retort for canned products or newer technologies like high pressure processing (HPP). So, I think the most exciting thing for me, and the reason I was really willing and interested in joining the industry, is there’s so much to learn. I don’t think we’ll ever run out of things to explore. I think as an industry the better we conduct this research, the better off we’ll all be.
Aaron: That’s the end of the interview! Thanks Drew.
Due to quick progressions in legalization, today’s cannabis industry bears little resemblance to the industry of five years ago. As the cannabis space gains mainstream acceptance, it resembles more “traditional” industries closely. In turn, how we consume cannabis has changed dramatically within this novel legal framework.
A brief visit to a cannabis dispensary quickly illuminates just how much the industry has changed in the past few years.
Within the dynamic of modern cannabis, perhaps no vertical has seen the same advancements as cannabis extracts. It’s precisely the growth of the concentrate category that has given rise to the many branded products that define the legal market.
To give a clear picture of how advancements in extraction have stimulated the concentrate category’s growth, we put together this brief exploration.
Standards & Technology
Before legalization, the production of cannabis extracts was a shady affair done in clandestine and often dangerous ways. Especially concerning BHO (Butane Hash Oil), home-based laboratories have long since been notorious fire hazards. Even more, with a total lack of regulation, black-market extracts are infamous for containing harmful impurities.
In the few short years that cannabis has been legal in Nevada, Washington and other states, extract producers have adopted standards and technology from more professional arenas. By borrowing from the food and pharmaceutical industries, concentrate companies have achieved excellence undreamed of a decade ago.
Good Manufacturing Practices
One of the essential elements in the extracts vertical advancements is the adoption of good manufacturing practices. According to the World Health Organization website, “Good Manufacturing Practice (GMP) is that part of quality assurance which ensures that products are consistently produced and controlled to the quality standards appropriate to their intended use.”
When adult-use cannabis was legalized in markets such as Colorado, cannabis companies were able to come out of the shadows and discuss GMPs with legit businesses. In doing so, they implemented professional controls on extract manufacturing in accordance with “quality standards” of state regulatory agencies.
Supercritical CO2 Extraction
As cannabis businesses adopted GMP from other industries, extract producers also embraced more sophisticated technology. Of these, supercritical CO2 has pushed the cannabis concentrates vertical into the future.
According to the equipment manufacturer Apeks Supercritical, “CO2 is considered to be a safer method of extraction because the solvent is non-volatile. The extract is purer because no trace of the solvent is left behind. It is also versatile and helps protect sensitive terpenes, by allowing cold separation.” By deriving methods from food production, supercritical equipment manufacturers have given cannabis companies a viable option for the commercial production of extracts.
Supercritical technology has helped push the concentrates vertical forward by providing a clean and efficient way to produce cannabis extracts. Nonetheless, supercritical CO2 equipment is highly sophisticated and carries a hefty price tag. Producers can expect to pay well over $100,000 for commercial supercritical CO2 extraction setup.
Products
Just as standards and technology have evolved in the cannabis extracts vertical, we have also seen products rapidly mature. Notably, the legal environment has allowed manufacturers to exchange ideas and methods for the first time. In turn, this dialogue has led to the development of new products, like isolates and live resin.
Isolates
Just as the name implies, isolates are concentrates made from a singular, pure cannabinoid. In today’s market, CBD isolates have grown increasingly popular because people can consume pure CBD without ingesting other cannabinoids or plant materials, including the legal 0.3% THC found in hemp.
Isolates are made by further purifying cannabis extracts in the process of purification, filtration and crystallization. As seen with other concentrates, isolates are used as the base for many cannabis products, such as gummies.
There is also growing interest in CBG isolate, which is another non-psychoactive cannabinoid when consumed orally.
Live Resin
The cannabis concentrate live resin has taken the industry by storm over the past few years. Live resin is a form of extract that is originally sourced from freshly harvested and frozen cannabis plants. The primary selling point behind this extract is the fact that fresh flowers produce much more vibrant aromas and flavors than dried cannabis. Interestingly, this pungency is tied to the preservation of terpenes in live resin.
Just a few of the dozens of various products types on the market today.
To make live resin, producers “flash freeze” fresh cannabis plants immediately after harvest. Valuable cannabinoids and terpenes are then extracted from the fresh, frozen plant material using hydrocarbon solvents. This whole process is done at extremely cold temperatures, ensuring no thermal degradation to the precious and volatile terpenes.
In lieu of these intricate steps to preserve the flower and extracts, live resin has continuously gained popularity. Namely because vaping with live resin is the best way to sample fresh cannabis terpene profiles in its most authentic fashion
It is amazing to see how much cannabis extracts have grown and progressed with legalization. Due to such amazing advancements in standards, technology, and products, the concentrates category has exploded on the dispensary scene. In today’s market, flowers have been largely sidelined in favor of concentrate-based products like gummies. These products now adorn dispensary shelves in beautiful packaging replete with purity and testing specifications.
It’s an often-overlooked fact that the purity standards of the legal extracts have made reliable cannabis brands possible in the first place. You cannot develop a cannabis brand without consistent products that customers can rely on; all things considered, it can be said that advancements in extraction have not only stimulated the concentrate category but the entire industry as we know it today.
Cannabis presents a plethora of challenges for entrepreneurs not seen in more traditional industries. Akin to the dot-com boom of the early 2000s, the cannabis industry has seen an astonishing flurry of business over the past decade. Within this dynamic landscape, new cannabis companies come and go on a near-daily basis.
To capitalize on novel markets’ potential, hopeful entrepreneurs from all walks of life have “jumped headfirst” into the cannabis space. This new breed of entrepreneurs must not only be smart, but they must also be challenging. Yet, as the cannabis industry evolves under the forces of legalization and innovation, our understanding of what defines cannabis entrepreneurs continues to change.
Cannabis businesses are shaped by the regulations, challenges and opportunities of specific market niches. As such, cannabis entrepreneurs have evolved with the environments in which they do business.
California & Proposition 215
California paved the way for the industry of today by legalizing medical cannabis in 1995. Since the passage of historic Proposition 215, cannabis has continued to gain momentum across the globe. This progress has happened through the visions and hard work of small business owners.
The early days of legal cannabis in California are now criticized for their lack of regulation. During the late 1990s and early 2000s, all you needed to start a cultivation business in California was a place to grow a garden. While early dispensaries did need local business licenses, they could legally purchase and sell untested products from unlicensed growers.
The genealogy of the modern cannabis industry can be traced directly back to the days of California’s Prop 215. During this era, the first cannabis dispensaries were founded – this model has since been replicated thousands of times. Also, the Prop 215 model gave rise to America’s first legal, commercial cannabis farms.
Cannabis entrepreneurs in California’s medical space focused primarily on developing the blueprints for a brand-new industry. To this end, they did not have the time or luxury to finetune the businesses for such things as operational efficiency and brand awareness. Even more, these people did not have to deal with such complexities as employee screening, product testing and seed-to-sale tracking.
Medical Cannabis Entrepreneurs
New medical markets stand in stark contrast to those seen in the early days of California. To this end, today’s medical markets operate within a web of stringent government regulations. For entrepreneurs, these rules set forth major emphases on both compliance and technology.
The Pennsylvania medical cannabis industry provides an excellent platform for understanding how the regulatory system of a market shapes entrepreneurial paths. For instance, medical cannabis cards are only issued to patients that meet the minimum criteria of 23 qualifying conditions, including severe conditions like aids, cancer and epilepsy. Beyond that, cannabis dispensaries in Pennsylvania must meet a slew of challenging criteria to operate and pay large sums of money in licensing fees.
To handle the regulatory requirements in places like Pennsylvania and remain profitable, medical cannabis entrepreneurs are incredibly dependent on technology. To this end, dispensaries utilize point-of-sale (POS) and seed-to-sale software to track inventory and stay compliant carefully. Even more, they use state-of-the-art security systems to safeguard their operations.
Cannabis entrepreneurs in medical markets must be able to run compliant operations and support their businesses with requisite technology. These elements stand in stark contradiction to the “wild west” mentality that pervaded the early industry. As such, it’s safe to assume that the rules of today’s markets force entrepreneurs to be more professional than in the days of CA Prop 215.
Adult-Use Cannabis Entrepreneurs
The most considerable difference between medical and adult-use cannabis companies has to do with their available customer base. Importantly, adult-use cannabis companies are only bound by minimum age requirements and state borders. Furthermore, limited restrictions on licensing create highly competitive markets that require sophisticated sales and marketing operations.
As there are no limits on potential customers, and limited regulations on license counts, business opportunities in adult-use markets are primarily directed by supply and demand rules. Because competition is the driving force in adult-use markets, entrepreneurs in this vertical have a good deal in common with peers outside the cannabis industry.
Perhaps the most defining characteristic of adult-use entrepreneurs is an emphasis on branding and marketing. As adult-use markets mature in places like Colorado, a phenomenon known as “brand concentration” occurs when a few companies come to dominate a majority of the market. As smaller companies fight for market share, they must develop professional brands that appeal to a broad customer base.
Cannabis entrepreneurs in adult-use markets must master the skills required in medical cannabis while also expanding their knowledge base in modern business dealings. Of these, the development of professional brands is one of the most defining characteristics of adult-use entrepreneurs.
It’s astonishing to see how much the cannabis industry has grown and matured looking back just a few short years. As business opportunities come about with new legalization efforts, entrepreneurs quickly rise to take advantage of untapped markets. As the cannabis business continues to evolve with the times, entrepreneurs must pivot to stay compliant, relevant and successful.
While the early Prop 215 market in California barely resembles today’s industry, it’s important to remember where we came from. Namely, our understanding of the contemporary cannabis business results from everyone who came before us. As the industry progresses, we will continue to complement established best practices with the requisite innovations that come with new opportunities.
Anyone owning and operating a cannabis business should know the value of proactive compliance management to operate successfully. For consumers, the view into the world “behind the budtending counter” is limited to the cool looking packaging, test results and the overall “vibe” of products they may want to try.
In our experience, as the oldest cannabis compliance firm, we’ve audited and visited hundreds of facilities and have seen the proverbial “Wizard behind the curtain”. We know “how the sausage is made.” And, as one can expect, it’s not always as glamorous in the back of the house as it appears on the shelf.
As markets expand and people buy into existing or new cannabis businesses, amid a world of thousands of competing companies and products, consumers need to ask themselves: “What do I know about the companies and products I consume?”
More and more, the question of consistent quality keeps coming up in the cannabis industry. Recalls are still ongoing in the news as products continually fail testing for potency and contamination.
Colorado, for example, is considered the shining jewel of the US industry in terms of experience, quality and integrity. However, consumers may be shocked to learn that a majority of dispensaries in the state do not operate by stringent SOPs, nor do they verify packaging and labeling for compliance, or review test results of products coming in and going out of their shops.
Starting January 1, 2021, these retailers finally have to develop and implement recall procedures in the event of contaminated products or cannabis that is causing adverse side effects. Later this year, vape pens will finally have their vapor tested instead of just the concentrate therein.
These liabilities or lack of compliance infrastructure may very well be a ticking time bomb no consumer in their right mind would want to deal with.
Bad Product/Brand Experience
Non-compliance and inconsistency on the part of operators translates directly into negative experiences for consumers. Whether its consuming a product that tastes like chlorophyll or enjoying a product the first time only to find a completely different experience the next time around, consumers experience the cost of non-compliance the most.
Beyond products, most consumers recognize their brand experience when shopping for products. Since the invention of Weedmaps, customers have always expressed their like or dislike for particular dispensaries and delivery services. Operators know these reviews from a customer’s experience can make or break their business and brand.
We always tell cannabis operators that a brand is a double-edged sword. As easily as it can strike through competitors, it can just as easily damage one’s own business.
Examples include SweetLeaf and Kushy Punch whose brands, once well-known and popular, are now synonymous with the worst of the worst given their histories of non-compliance and shut downs.
For consumers, finding consistent, quality products at a fair price is often the most important consideration to avoid the cost of a bad experience with cannabis. For visitors or first-time consumers, this could mean the difference between trying cannabis again or deciding it’s simply not for them.
Contamination & Illness
Preventing contamination can save a business from extremely costly recalls.
The worst-case scenario for consumers, especially patients, is the cost of consuming contaminated products or otherwise having adverse effects from the use of cannabis. While cannabis itself is one of the least harmful substances known to man, contaminated cannabis can be dangerous or deadly.
In the early days of the industry and in many emerging markets with poor to no oversight, these lessons are learned most severely. From the use of non-commercial washing machines being used for water-based extracts that tested positive for E. coli to recalled products ladened with Eagle 20 (which contains the harmful pesticide known as Myclobutanil), the industry has been reactive to safety measures and complying with best practices.
Still, some states persist with limited to no testing and simply label products with a warning to consumers that they are using cannabis at their own risk without testing for safety or efficacy.
Most consumers may be shocked to know that most cannabis companies do not adhere to good agricultural practices or good manufacturing practices (GAP/GMP) to ensure consistent quality and safety standards in similar industries such as nutraceuticals and food manufacturing.
Patients already weakened by disease states – including auto-immune disorders – are most at risk and understand all too well the costs of hospitalization, medical bills and loss of quality of life. For the average adult user, these risks are the same and there is often little to no recourse with the dispensary or product manufacturers if the product slips through contamination testing because of the non-compliance of product validation on flower or infused products.
For companies, outdated and inaccurate SOPs as well as production batches are the only line of defense to protect the company from product liability lawsuits filed by consumers in the event of contamination and illness. Most cannabis companies do not manage this aspect of their business effectively and simply assume they are sufficiently compliant without proactively measuring such compliance and adjusting operations as necessary.
Long-Term Consequences
Consumers would do well to remember that the modern industry is infantile in its development compared to other heavily regulated industries. Cannabis companies are babies learning to crawl while major food and beverage, pharmaceutical and nutraceutical, and alcohol and tobacco industries are far ahead of the game. The US industry, is arguably, already behind the compliance curve comparative to other nations already placing stricter regulations and standards on licensees.
For customers, this can be a confusing experience given that no two batches of flowers will taste the same let alone give a consumer exactly the same effect.
Already, customers are learning Sativa and Indica are imaginary cultural terms to describe generalized characteristics of major and minor cannabinoids and terpenes in each strain which produces a variety of effects – despite state limitations on labeling these active ingredients.
Vape pens are under increasing scrutiny as regulators discover long-term effects of vape use from the tobacco industry causing EVALI in consumers and being deemed as dangerous. As with anything new, the data and science simply aren’t there to truly tell customers what the effects may be over the long run. It has taken decades for tobacco, as an example, to go from doctor-recommended to carcinogenic.
Consistency in quality standards requires meticulous SOPs
Similarly, Big Cannabis of the future may be facing similar concerns that aren’t being warned about currently on their products and consumers could face unknown long-term consequences. In no way is this a condemnation of cannabis and early research shows cannabis is much safer than either alcohol or tobacco.
The point is to emphasize that over the long run, compliance is key to tracking the consistency and safety of products to avoid long-term liability and costs on consumers. Consumers would be wise to gravitate towards compliant brands and companies that focus on consistent quality and safety to minimize potential long-term negative impacts and costs.
Accountability & Transparency
Customers must first understand where the buck stops and who is responsible for what as it applies to cannabis and the cannabis products they consume. This can vary between states from vertically integrated models to horizontal models which allow for independent businesses to buy and sell cannabis between each other.
In the case of cannabis, the restrictions on METRC and other state “seed to sale” tracking systems make it nearly impossible for customers to return products and unclear on how to file complaints.
METRC and other seed to sale systems dictate that dispensaries must be able to track originating sources of cannabis back to another licensed facility. As such, once the consumer buys a faulty vape pen, for example, it’s gone from the dispensary inventory. Bringing it back in physically creates non-compliance issues for the dispensary as they cannot virtually account for the physical addition back into inventory.
No one ever said making sausage was a pretty or easy process. That’s why most consumers don’t want to think about how it’s done.
This example is a simple one to showcase the importance of compliance in the cannabis business and the complexities businesses must go through to operate. What is more applicable and important for consumers to understand is how non-compliance and inconsistency can affect them negatively – beyond messy fingers from leaky vape carts.
Consumers should ask cannabis companies about their product quality standards
These types of unexpected issues represent significant costs for cannabis operators in recalls, fines, lawsuits and fees which is what most people think the “costs of non-compliance” mean.
However, and in addition to the literal cost mandated by regulation, there are the costs owners don’t think about: in the time and fees charged by the professionals to solve these issues, the time and stress spent on production, the increase or decrease in supply, mitigating product liability, and brand recognition and damage due to poor quality or recalls.
All of these factors simply drive up the costs of products for consumers and decrease the reliability of finding consistent, quality products and brands that customers can count on.
As we always say at iComply:
“It is always more cost-effective to be proactive, rather than reactive, when it comes to operational cannabis compliance management.”
Consumers would be wise to recognize which companies are proactive in managing their compliance. And companies would be wise to get ahead of these customer costs by being the proactively compliant companies that consumers want and need.
To say 2020 was a historic year is an understatement.
Arizona landed in a solid eighth place among the top ten most successful cannabis states thanks to its expansive medical cannabis program. To close out the year, voters approved Proposition 207, also known as the Smart and Safe Arizona Act (SSAA), making Arizona one of 15 states, plus Washington D.C., to legalize the adult use of cannabis, which is expected to rocket the state’s overall cannabis sales to new heights.
It’s essential to this conversation that we clarify the two sides of this rapidly growing industry. Medical cannabis is a form of treatment, the adult use and consumption of cannabis is a choice. During the pandemic, in many medical cannabis states, the medical cannabis industry was deemed an essential service and allowed to continue providing valuable medicine to patients and caregivers. As medical cannabis programs continue to provide safer therapeutic options which are complementary to or serve as an alternative to many traditional treatments and narcotics, especially opioids, patients can be confident the need for medical programs will continue. Arizona’s adult use cannabis program imposes greater limitations on quantity and potency, while also requiring higher standards for packaging. We saw a trend during the pandemic as again, many states prioritized and allowed their medical programs to continue, while limiting adult use facilities, in the same manner as other non-essential businesses.
It’s also worth noting that we have seen many inevitable changes in patient behaviors during the pandemic, including an increased need for medical cannabis. There was a patient demand for convenience, safety and no-contact services, increased online ordering, scheduling and curbside pick-up or delivery. Many of these services were already on the rise in popularity throughout the various legal states. While Arizona’s recreational program prohibits delivery until at least 2023, retail adult use consumers will expect some of these services to extend to the new market. As life after the COVID-19 pandemic continues on and the need for some of these safer more convenient options also continues, we hope to see them more permanently implemented from a legal and regulatory perspective. For now, here are the highlights we’ll see come into play in the first few months of 2021 as Arizona adopts its new adult use cannabis program.
Smart and Safe Arizona Act (Prop 207):
Legalizes the sale, possession (one ounce) and consumption of adult use cannabis for adults at least 21 years old.
Adds a 16 percent excise tax on adult use cannabis sales, in addition to the state’s 5.6 percent, totaling a 21.6 percent tax.
Allocates an estimated $300 million in Arizona revenue to be divided between community college districts, municipal police, sheriff and fire departments, fire districts, highway funds, public health programs, infrastructure, and a new Justice Reinvestment Fund.
Allocates more than $30 million annually for addiction prevention, substance treatment, teen suicide prevention, mental health programs, and justice reinvestment projects.
Provides opportunities for expungement of certain lesser cannabis-related crimes such as possession, consumption, cultivation or transportation.
But of course, state law is just one part of the equation. Adult use cannabis facilities must be licensed separately from state to local levels, including counties to cities to local municipalities, all of which may also adopt rules and requirements through zoning and land use ordinances. Swift and certain timelines established by the Smart & Safe Act dictate the speedy launch of this new program, first utilizing the existing medical cannabis infrastructure.
Many Arizona consumers are under the impression that they’ll be able to walk into a dispensary on January 1, 2021 and buy cannabis. But that is not the case. They’ll have to wait until the Arizona Department of Health Services (AZDHS) completes the early applicant licensing process, which begins in January 2021. Currently, local and multistate operators are waiting for AZDHS to complete the rules and regulations for the adult use cannabis program. Here are two of the most significant steps to be navigated in the upcoming weeks:
Smart and Safe Arizona Act (Prop 207) – Step 1: The Rulemaking Process
AZDHS has been tasked with developing the rulemaking process for the Smart & Safe Act. The first draft of the adult use cannabis program rules has already been released, primarily consisting of the application requirements for the early applicant process. AZDHS collected its first round of public comments for consideration on Thursday, December 17, 2020. The exact details and parameters of the adult use cannabis program will not be finalized or known for certain until AZDHS completes the rulemaking process. We anticipate the next draft of adult use cannabis rules to be released sometime in early January.
Smart and Safe Arizona Act (Prop 207) – Step 2: The Application Process
AZDHS will begin accepting early applicants under the Smart & Safe Act on January 19, 2021, closing the process on March 9, 2021. Current medical cannabis license holders who apply for and acquire an adult use license in the early applicant process will be authorized to a dual-licensed dispensary (both medical and adult use license), as well as one offsite manufacturing facility (which may later be amended to include both medical and adult use manufacturing license), and offsite cultivation.
Early adult use license applicants are reserved for those that currently hold in good standing at least one Medical Marijuana Registration Certificate (“Medical Marijuana License”) and applicants applying to counties with no current operating dispensaries. Any county with a single operating dispensary (a medical cannabis dispensary) will be allocated an adult use license (dual license) as long as the medical license holder is in good standing for the application. All adult use licenses allocated to those counties without a current operating dispensary must keep that dispensary within that county.
AZDHS will have 60 days to process each application. Adult use licenses for counties without a current operating dispensary will be allocated through a random selection process, if more than two applications are received for that county. Additionally, upon the conclusion of the early applicant process, any adult use license that has not yet been awarded through that process, will be available to the general public and allocated through a random selection process.
This brings us to later phases of implementation of the Smart & Safe Act: within approximately six months of the adoption of the initial recreational program rules, AZDHS must develop and adopt the rules and regulations for the Social Equity Ownership Program (SEOP). The primary goal of the SEOP is to allocate 26 adult use licenses to “communities disproportionately impacted by the enforcement of previous cannabis laws.” In other words, communities disproportionately and negatively impacted by cannabis criminalization. Smart & Safe is light on the exact manner and process at this point, so Arizona voters and cannabis companies will look to AZDHS for the development and implementation of this important part of the adult use program. Stay tuned.
The cannabis industry is growing so quickly that even COVID-19 can’t slow it down. Before the pandemic, the industry amassed $13.6 billion in U.S. legal cannabis sales in 2019 – a figure that is expected to more than double to $30 billion in the next five years, according to New Frontier Data. In states where cannabis is legal for medical or recreational use, dispensaries have been deemed necessary, essential businesses – especially when it comes to calming stress and anxiety in our ever-changing times.
Cannabis legalization and newly budding dispensaries have expanded across the U.S., which may come with an unfortunate counterpart – a higher incidence of crime. Despite lower prices in states that have legalized cannabis, as compared to states where it is still illegal, theft has run rampant across grow operations, warehouses and, most often, dispensaries.
Heavy-duty security doors at the front of the dispensary block sight access and provide a visual deterrent.
Dispensaries can be targeted more frequently. Robbers may perceive them as an easy target, because they are businesses that have larger amounts of cash on hand. Many dispensaries only accept cash because payment processors and financial institutions aren’t willing to work with them. This is primarily because cannabis is still deemed an illegal substance under federal law, and the actions of financial institutions are governed by federal, not state, laws. Once the Secure And Fair Enforcement (SAFE) Banking Act is approved, cannabis businesses will be able to work more easily with banks, in turn reducing the amount of cash on site and erasing the dollar signs in opportunistic thieves’ eyes.
However, cash isn’t the only high thieves seek when they break into dispensaries. There’s also the product itself. Protecting it – and providing peace of mind to the facilities’ owners and occupants – is a concern for dispensaries, grow operations and warehouses. Robbers are motivated by the opportunity to make even more fast cash through reselling the product found onsite.
To eliminate such easy targets, security requirements for the cannabis industry are a necessity. They are also involved, complicated, and vary from state to state. A number of security specifications apply between state laws and local ordinances. Inventory must be properly surveilled and managed at all stages of transportation and storage. Any discrepancies in inventory can result in large fines and other penalties. To aid in understanding security compliances, the National Cannabis Industry Association (NCIA), a national trade association, recommends that start-ups obtain attorneys to guide businesses through their state’s laws and regulations.
This is why, especially for new business owners, it is critical to consider the best, most advanced security solutions – especially when it comes to doors and points of egress – that are easily integrated into buildings during the design phase. These solutions protect the products, properties, and people throughout the cannabis supply chain.
Understanding State Security Regulations While there are no federally recognized security requirements for the cannabis industry, there are similar requirements across all states that have legalized cannabis, including:
Maintaining strict access control throughout the facility – this is especially important for grow operations and warehouses
Functional alarm systems
Documented standard operating procedures
Video surveillance systems – many states mandate very precise requirements, such as length of storage time and even video resolution specifications
Notifying appropriate regulatory agencies immediately or within a strict timeframe after a security incident or theft
Securing all records and record storage
While these are common, state-mandated security requirements, it is critically important to know and understand all rules, regulations, and laws concerning the industry within the business’s specific state. Making sure the business is compliant with all aspects of state laws for security and preventing violations, including the hefty financial penalties that can accompany them, is key.
States require cannabis facilities to implement sophisticated security features for several reasons. One of the most obvious is the fact that the industry supplies a high-value product and is a cash-intensive business. Integrating security features into the building can be a challenging task for architects and designers. To help tackle these challenges, manufacturers have introduced products to the cannabis industry, creating easier, more effective and aesthetically pleasing security solutions.
Integrated Designs For High Level Security Security shouldn’t be a constraint when considering design aesthetics. Certain elements can be discretely tucked away, including cameras and security doors by way of specifying a concealed rolling door, conveniently disguised in the ceiling during operating hours. These doors can even close under alarm eliminating the need for manual intervention. Other security measures, such as bullet resistant glass, are hidden in plain sight.
Rolling doors like this one can be conveniently disguised in the ceiling during operating hours.
Untrustworthy employees, smash-and-grab thefts or meticulously planned heists mean secure building design is of the utmost importance. In order to have the most effective security, there needs to be design vision – a clear intent for incorporating advanced security into the facility, whether visible or not.
Suggested security measures include video surveillance around the outdoor perimeter of the property as well as inside the facility. Physical barriers, such as specialized entrance locking systems – including fingerprint-scanning biometric technology – and security doors that may also include intrusion detection and automatic closure systems are recommended. All systems may be paired with 24/7 visual monitoring by security personnel.
Many state regulations also require restricted access to specific areas within dispensaries, grow operations and warehouses, with employee names and activities logged for reference. These necessary measures aid in inventory monitoring and control, further reducing the likelihood of internal theft.
When specifying building security, it’s important for architects to consider what type of building they are designing. There are differences in providing security for dispensaries versus warehouses and grow operations. Dispensaries and storefronts are frequently out in the open and in locations that are well-known to consumers. Warehouses and grow operations are usually tucked out of the way, rarely publicized, and less noticeable.
Rolling Grilles And Doors Deter Dispensary Theft With a high-value product and cash on hand, dispensaries in particular have unique security challenges. And because they are retail businesses, egress and fire codes must be strictly adhered to, in addition to special security regulations.
Rolling grilles can be an effective deterrent against dispensary theft
In light of this, security doors require special consideration. They are necessary to provide secure protection against theft but shouldn’t distract from the architectural vision of the building or interior design.
Rolling security grilles are the ideal solution to protect the counter inside the dispensary and may also be ideal for the front of the store. They fit in small headspaces where there is limited ceiling room and can be easily concealed when not in use.
Even heavy-duty rolling doors used to protect the glass storefront of the dispensary and prevent intruders from entering the building’s dock area can be hidden when not in use. If building code allows, architects may specify a rolling door that coils up into the door’s header, residing behind an exterior soffit. These robust security doors’ lift-resistant bottom bars also can be obscured from sight.
Heavy-duty security doors at the front of the dispensary block sight access and provide a visual deterrent. They give the building a secured look when in use, but heavy-duty rolling doors don’t need to be imposing to customers during the dispensary’s operating hours.
Robust Visible Protection For Grow Operations And Warehouses
Grow operations and warehouses usually opt for more visible security doors to deter criminal activity. They also have different design considerations because of building layout and production needs. For instance, larger grow operations house plants and supplies which require heavy equipment to move throughout the facilities.
A heavy duty steel rolling grille
Heavy duty rolling security doors can be made with up to 12-gauge steel with interlocking slats and tamper resistant fasteners – making them stronger than standard garage doors. They provide high-end security at loading docks and limit access to restricted areas inside.
Rolling doors can also be used to block employee access to off-limits areas common in grow operations and warehouses. Because they are heavily reliant on utilities and infrastructure, such as water mains and humidity and temperature controls, warehouses and grow operations are ideal applications for rolling doors. If unauthorized personnel with ill intentions access these utility areas, it could spell disaster with ruined crops and damaged or unsafe products – turning into substantial financial losses. From a design standpoint, these doors do not need to be concealed. In fact, their visibility signals restricted access areas and hints at the security measures taken to protect these facilities.
Enhanced Security Features
Whether designing a dispensary, a grow operation facility, or a warehouse, rolling doors may be paired with automatic protection features to enhance the building’s security and help workers feel safe. These automatic closing systems allow the security doors to be immediately activated by a building alarm or the push of a panic button in emergency situations. The doors also feature advanced locking systems – some of which are hidden in non-traditional locations – providing further tamper resistance.
Some rolling door manufacturers offer in-house architectural design groups to guide architects and designers in choosing the ideal security doors. These groups can address and solve any design dilemmas that arise during the project. Every rolling door is built to a specific opening, making each product unique to that area of the project. Because of this customization, manufacturers can meet virtually any specification.
Meeting Insurance Requirements
Selecting the correct rolling door along with other advanced security features aids in meeting insurance requirements. Each insurance company has individual minimum-security conditions in its policy. Many insurance companies will not provide theft insurance if cannabis businesses do not have adequate security or cannot demonstrate they have it.
Planning Leads To Integrated Protection The technical and legal aspects of securing dispensaries, grow operations, and warehouses can be overwhelming and, at times, confusing. Legal counsel, state agencies, industry associations, and manufacturers encourage new cannabis businesses to use them as resources as they unravel the nuances of the industry’s security regulations.
By combining robust security features such as video surveillance, proper access controls, rolling doors or grilles and automatic closure systems, cannabis facilities can meet state and insurance requirements and deter theft. With thoughtful design consideration and planning, these security features also have the capabilities to seamlessly blend with interior and exterior design aesthetics.
Worth an estimated $54 to $67 billion, the bourgeoning U.S cannabis industry continues to grow at record pace despite conflicting state and federal laws that cause obstacles at every turn.
This conflict remains a source of uncertainty for retailers, cultivators and the general public. And, unfortunately, the palpable tug of war between the states and the federal government will only increase when legalization is introduced at the federal level, putting tax dollars up for grabs.
A tug-of-war between the states and the federal government makes it difficult for cannabis businesses to obtain bank accounts, insurance and investors. It also means additional security and compliance challenges. It is the reason that the cannabis industry is an unsupportive environment for start-ups and employees who face primitive or even dangerous R&D conditions in order to advance the extraction process.
As cannabis companies fight to grow their market share, many lag behind when instituting a proper risk management structure from R&D to daily operations. Cannabis businesses that haven’t incorporated risk management will need to in 2021, especially when seeking to secure funding from PE firms.
As the 8th fastest growing industry in the U.S., maturing at more than 25% annually, adult use and medical cannabis sales are unlikely to decrease anytime soon. Rather, experts predict continued growing pains – and gains – to shape the U.S. cannabis industry in 2021.
The COVID-19 pandemic will continue to increase the growth of the cannabis industry— with a few roadblocks
Deemed “essential businesses,” many retail outlets and dispensaries stayed open throughout the pandemic and adopted new ways of serving customers, from curbside pick-up to drive-through windows and deliveries. At the same time, the pandemic hindered growth for some cannabis operations on the cusp of obtaining a license, as many applications were put on hold when state offices closed their doors for months. In some cases that meant raised capital was pulled and funding ceased. For start-ups who are seeking to apply again in 2021, it’ll be an uphill climb.
As a result of routine COVID-19 inspections in 2020, state officials uncovered a host of other issues at cannabis operations, including improper labeling, poor health and safety practices, lack of PPE compliance by staff and customers, incorrect counting of cash and more. In extreme cases, these visits resulted in regulatory fines and shutdowns. This led to the need to use seed money for something other than the organization’s original mission. In 2021, these scenarios are likely to turn into lawsuits from shareholders and activate directors & officers (D&O) and employment practices liability (EPL) claims from laid-off workers. These accusations dovetail with another major charge often levied against cannabis businesses —lightning speed growth without the business operations and risk management protocols necessary to support it.
Many cannabis businesses have not procured the necessary liability insurance coverage for the great risk that come with rapid growth. Whether it’s D&O and EPL policies as in the case above, or cyber, property or general liability (GL) policies, it’s critical to think more holistically about insurance coverage. Cannabis operations need to work with an insurance broker who specializes in the cannabis industry and understands different operations and business location, as exposures vary greatly.
R&D extraction dangers lead to unique risks
In 2021, extraction will be a major focus for cannabis organizations. Operations will continue searching for a competitive advantage to increase yield and develop superior products. Cannabis extractors will experiment with new ways to apply existing laboratory methods utilizing ethanol and CO2 as well as innovative cultivation methods adopted from the agriculture industry, using water and light exposure and different nutrients. R&D becomes a potential liability when cannabis extractors modify the use of existing equipment for a different type of extraction. Flammable products are often required, and explosions can occur.
If you are considering experimenting with R&D, engage your insurance broker to ensure the risk is covered within your existing policies and to explore best practices for experimentation and varying equipment use.
Desire for more security both inside and outside the operation
A cannabis operation’s security risk is two-fold. In light of the looting and civil unrest across the U.S. this year, heightened security measures were necessary for cannabis businesses to secure their goods. Additionally, a common risk— employee theft —increased as well.
Cannabis retail operations maintain a large supply of cash and product. As looting occurred, it was impossible to relocate cannabis product away from retail storefronts as a majority of state regulations prohibit cannabis to be removed from retail facilities. Owners and operators who did so risked being fined for non-compliance or losing their license.
The majority of cannabis theft — as high as 90% by some estimates — is employee related. In many cases, employees in cannabis grow facilities and retail storefronts scheme to cheat employers. Part of the challenge is that state regulations require plant and production facility blueprints to be publicly available. Thieves are using these layouts to plot their infiltration. In other scenarios, cannabis operators are recording walk-throughs of their facilities and publishing online documentaries. These also leave operators vulnerable.
Employers can increase security by restricting access exclusively to employee areas, while also investing in better internal access controls. Conduct an audit of your work areas with your cannabis insurance broker who can provide you with a list of best practices and do’s and don’ts for reducing theft.
Complications continue in compliance, banking and financial services
Even though cannabis is legal for medicinal or recreational use in 43 states, businesses still struggle to secure bank accounts, business loans and insurance coverage. Small local banks and savings and loan businesses may be more willing to engage with cannabis businesses in 2021, while large institutions will keep shying away.
At every stop of the supply chain, cannabis business operators need to be proactive when developing strategies to manage risk. That means implementing risk management protocols to protect their business, their workforce as well as securing the proper insurance coverage.
This also includes growing the cannabis business’ safety net by engaging necessary insurance policies, appropriate to the business’ size and exposure, including cyber, environmental liability and crime policies, or applying for emerging loan programs in an effort to secure additional capital.
Evolution of the industry into 2021 and beyond
While the cannabis industry is evolving and changing, much will ultimately remain the same in 2021. Even if the U.S. government takes steps to federally legalize cannabis, a bill would not go into effect until later in the year at best, more likely in 2022 or beyond. Until a bill is passed, cannabis businesses will look to remain viable beyond the state level. For all cannabis businesses, 2021 will be about building on what they’re already doing and preparing for what will hopefully come next.
The cannabis industry is growing and evolving at an unprecedented pace and regulators, consumers and businesses continually struggle to keep up.
Cannabis businesses: How do you maintain an edge on the market, avoid costly mistakes?
Case Study: Costly Facility Build Out Oversights
David Vaillencourt will be joining a panel discussion, Integrated Lifecycle of Designing a Cultivation Operation, on December 22 during the Cannabis Quality Virtual Conference. Click here to register. A vertically integrated multi-state operator wants to produce edibles. The state requires adherence to food safety practices (side note – even if the state did not, adherence to food safety practices should be considered as a major facility and operational requirement). They are already successfully producing flower, tinctures and other oil derivatives. Their architect and MEP firm works with them to design a commercial kitchen for the production of safe edibles. The layout is confirmed, the equipment is specified – everything from storage racks, an oven and exhaust hoods, to food-grade tables. The concrete is poured and walls are constructed. The local health authority comes in to inspect the construction progress, who happens to have a background in industrial food-grade facilities (think General Mills). They remind the company that they must have three-compartment sinks with hot running water for effective cleaning and sanitation, known as clean-out-of-place (COP). The result? Partial demolition of the floor to run pipeline, and a retrofit to make room for the larger sinks, including redoing electrical work and a contentious team debate about the size of the existing equipment that was designed to fit ‘just right.’
Unfortunately, this is just one more common story our team recently witnessed. In this article, I outline a few recommendations and a process (Quality by Design) that could have reduced this and many other issues. For some, following the process may just be the difference between being profitable or going out of business in 2021.
The benefits of Quality by Design are tangible and measurable:
Reduce mistakes that lead to costly re-work
Mitigate inefficient operational flow
Reduce the risk of cross-contamination and product mix-ups. It happens all the time without carefully laid out processes.
Eliminate bottlenecks in your production process
Mitigate the risk of a major recall.
The solution is in the process
Regardless of whether you fall in the category of a food producer, manufacturer of infused products (MIP), food producers, re-packager or even a cultivator, consider the following and ask these questions as a team.
People
By standardizing and documenting safety procedures, manufacturers mitigate the risk of cannabis-specific concerns
For every process, who is performing it? This may be a single individual or the role of specific people as defined in a job description.
Does the individual(s) performing the process have sufficient education and training? Do you have a diverse team that can provide different perspectives? World class operations are not developed in a vacuum, but rather with a team. Encourage healthy discourse and dialogue.
Process
Is the process defined? Perhaps in a standard operating procedure (SOP) or work instruction (WI). This is not the general guidance an equipment vendor provided you with, this is your process.
How well do you know your process? Does your SOP or WI specify (with numbers) how long to run the piece of equipment, the specification of the raw materials used (or not used) during the process, and what defines a successful output?
Do you have a system in place for when things deviate from the process? Processes are not foolproof. Do not get hung up on deviations from the process, but don’t turn a blind eye to them. Record and monitor them. In time, they will show you clear opportunities for improvement, preventing major catastrophes.
Materials
What are the raw materials being used? Where are they coming from (who is your supplier and how did you qualify them)?
Start with the raw materials that create your product or touch your product at all stages of the process. We have seen many cases where cannabis oils fail for heavy metals, specifically lead. Extractors are quick to blame the cultivator and their nutrients, as cannabis is a very effective phytoremediator (it uptakes heavy metals and toxins from soil substrate). The more likely culprit – your glassware! Storing cannabis oil, both work in process or final product in glass jars, while preferred over plastic, requires due diligence on the provider of your glassware. If they change the factory in which it is produced, will you be notified? Stipulate this in your contract. Don’t find yourself in the next cannabis lead recall that gets the attention of the FDA.
Savings is gained through simple control of your raw materials. Variability in your raw material going into the extractor is inevitable, but the more you can do to standardize the quality of your inputs, the less work re-formulating needs to be done downstream. Eliminate the constant need to troubleshoot why yields are lower than expected, or worst case, having to rerun or throw an entire batch out because it was “hot” (either too much THC in the hemp/CBD space or pesticides/heavy metals). These all add up to significant downstream bottlenecks – underutilized equipment, inefficient staff (increase in labor cost) all because of a lack of upstream controls. Use your current process as a starting point, but implement a quality system to drive improvement in operational efficiency and watch your top line grow while your bottom-line decreases.
Consistency in quality standards requires meticulous SOPs
Have you tested and confirmed the quality of your raw material? This isn’t just does it have THC and is it cannabis, but is it a certain particle size, moisture level, etc.? Again, define the quality of your raw materials (specifications) and test for it.
Remember – ranges are your friend. It is much better to say 9-13% moisture than “about 10%”. For your most diligent extractor, 11% will be unacceptable, but for a guy that just wants to get the job done, 13% just may do!
Test your final product AFTER the process. Again, how does it stack up against your specifications? You may need to have multiple specifications based on different types of raw material. Perhaps one strain with a certain range of cannabinoids and terpenes can be expected for production.
Review the data and trend it. Are you getting lower yields than normal? This may be due to an issue with the equipment, maybe a blockage has formed somewhere, a valve is loose, and simple preventive maintenance will get you back up and running. Or, it could be that the raw biomass quality has changed. Either way, having that data available for review and analysis will allow you to identify the root cause and prevent a surprise failure of your equipment. Murphy’s law applies to the cannabis industry too.
You are able to predict and prevent most failures before they occur
You increase the longevity of your equipment
You are able to predict with a level of confidence – imagine estimating how much product you will product next month and hitting that target – every time!
Business risks are significantly mitigated – a process that spews out metal, concentrates heavy metals or does not kill microbes that were in the raw material is an expensive mistake.
Your employees don’t feel like they are running around with their hair on fire all the time. It’s expensive to train new employees. Reduce your turnover with a less stressed-out team.
Takeaways
Maintaining a competitive edge in the cannabis industry is not easy, but it can be made easier with the right team, tools and data. Our recommendations boil down to a few simple steps:
Make sure you have a chemical or mechanical engineer to understand, optimize and standardize your process (you should have one of these on staff permanently!)
Implement a testing program for all raw materials
Test your raw materials – cannabis flower, solvents, additives, etc. before using. Work with your team to understand what you should and should not test for, and the frequency for doing so. Some materials/vendors are likely more consistent or reliable than others. Test the less reliable ones more frequently (or even every time!)
Test your final product after you extract it – Just because your local regulatory body does not require a certain test, it does not mean you should not look for it. Anything that you specified wanting the product to achieve needs to be tested at an established frequency (and this does not necessarily need to be every batch).
Repeat, and record all of your extraction parameters.
Review, approve and set a system in place for monitoring any changes.
Congratulations, you have just gone through the process of validating your operation. You may now begin to realize the benefits of validating your operation, from your personnel to your equipment and processes.
The drug war has harmed communities of color since its inception. For decades and decades, BIPOC (Black, Indigenous, and other People of Color) have been nearly six times more likely to be arrested for drug use than White Americans, despite similar rates of use.
Over the years that legalized cannabis has proliferated across the country, the same trends of market consolidation have emerged in every state that has legalized the plant. BIPOC communities already impacted by the drug war have less access to capital and therefore less access to the cannabis industry. Cannabis market consolidation has always led to white people taking a greater market share while BIPOC communities are left behind.
The legal cannabis industry currently lacks representation of BIPOC executives, business owners, and professionals. Ernest Toney, former global marketing and partnerships manager at Marijuana Business Daily, wants to change that. He founded the BIPOC Cannabis Business Network – a membership community that is working to make the cannabis industry more accessible and profitable for BIPOC professionals and business owners.
BIPOCANN is a place to meet cannabis industry leaders, a place to exchange goods, services and ideas that promote BIPOC economic growth in cannabis, an innovation hub for unique voices and perspectives, and it’s all BIPOC-owned and managed.
In this interview, we sit down with Ernest Toney to hear about BIPOCANN and ask him some questions about what the future of the cannabis industry could look like.
Cannabis Industry Journal: Tell me about your background- how did you get involved in the cannabis industry?
Ernest Toney: I grew up in Virginia and went to James Madison University where I studied kinesiology, and sports management in graduate school. That led me to pursue a career in sports administration, beginning as a sales and marketing director for a large YMCA in the southwest, followed by a stint as a sales consultant for the Arizona Diamondbacks in Major League Baseball. Immediately prior to joining the cannabis industry, I worked at USA Ultimate – the national governing body for the niche sport of ultimate (frisbee) in the United States. During that time, I managed and scaled adult programs and events across the country. A big part of my job required collaborating with national stakeholders and creating and enforcing policies to grow the sport by making it more accessible to diverse demographics. We also worked hard to increase the commercial visibility of the sport through mainstream media, including ESPN, with gender equity being a major focus area. It was cool because looking back, I learned a lot of things during that five-year period that is directly applicable to the work I’m doing to support the cannabis industry.
Ernest Toney, founder of BIPOCANN
But my interest in the cannabis industry became strong when I moved to Denver in 2011, a year before Amendment 64 passed. When Colorado became the first adult use cannabis market in the USA, it was an exciting time. I have always been curious about economics and how policies can impact people’s lives. I was interested in what was going to happen when the new market opened.
Early on, I followed the industry trends very closely. Living in downtown Denver, I saw firsthand the effects the cannabis industry was having on day-to-day life, like increased tourism, a housing market boom, a lot of new start-ups, dispensaries opening everywhere. It was just something I knew I wanted to learn more about.
Around 2016, I started making industry connections, but didn’t pursue opportunities until a few years later. Eventually, I was hired in 2018 by MJBizDaily to focus on new business initiatives. Some of my past successes with scaling programs, national and international event management, and community-building aligned with what they were looking for.
I started as the company’s first international marketing manager. In that role, I was responsible for driving marketing campaigns to increase the company’s global readership, event registrations, and business conference presence in foreign markets. After the first year, I transitioned to identify and manage marketing partnerships for the company – which included international and domestic media, event, and affiliate partnerships within and outside of cannabis.
I felt compelled to make a change amidst the social unrest this summer. I was doing my own protesting and volunteer advocacy in Denver, but started to see more broadly, in the cannabis industry, that cannabis executives and companies were bringing attention to the fact that the War On Drugs has been problematic for minorities and communities of color. There was greater talk about social equity programs and how they are not as effective as they should be. There was greater attention to the fact that over 40,000 people are still incarcerated for the plant that others are profiting from – and that the people behind bars are predominantly coming from communities of color. I was in a position that afforded me the opportunity to see what the composition of the global cannabis industry looked like, and I could see minority representation was lacking in business ownership, leadership positions, and more.
I thought – what is the best way for me to use my talents, insights, and knowledge to affect and change this narrative? Ultimately, I decided to start my own business. Not only was this an opportunity for me to “walk the walk,” being a black man starting a business in this industry where there is a lack of black ownership, but more importantly I was uniquely positioned to be able to educate and let people know about the opportunities to be a part of the booming industry. So, I did some brainstorming and came up with a company, which is called BIPOCANN and it stands for connecting BIPOC communities to the cannabis industry.
The work I have been doing for the last quarter includes directly recruiting people into the industry. If you are curious and want to learn more about the industry, then BIPOCANN can be the entry point. We figure out what your goals are and use the network and our resources to get you connected and figure out where you want to go. Likewise, if you are a service provider, like a graphic designer, accountant, marketer or business owner for example, that sees opportunities for your business to play a role and support it from an ancillary standpoint, BIPOCANN can be an entry point for you too.
The other component to it is working with existing businesses who are trying to make the industry more accessible. I work with existing companies and brands to create platforms that amplify voices and make BIPOC folks more visible, seen and heard within the cannabis industry. We are also helping businesses increase their profitability through diversification tactics and marketing tactics that contribute to their bottom line.
CIJ: Tell me about BIPOCANN- what is it, what are your goals with this project and how has it been received so far?
Ernest: The prohibition of cannabis has disproportionately impacted communities of color in the Americas. I alluded to this earlier, but there are more than 40,000 people behind bars in the U.S. for cannabis possession and use. There’s evidence suggesting that Black Americans are up to six times more likely to get arrested for cannabis use than White Americans despite use rates being the same. And when you look at the makeup of the professional industry, there is poor representation of business ownership by people of color. The Cannabis Impact Fund references that only 4.3% of dispensaries are Black or Latinx-owned. These problems intersect in a lot of ways.
BIPOCANN is a small business working to make the cannabis industry more accessible and profitable for BIPOC professionals and business owners. Now, I know that one company cannot change 100 years of cannabis prohibition and how policy works. But if you want to make this industry more accessible, inclusive, and profitable for those who do not have the access then there are a lot of levers to pull. Policy is one. But BIPOCANN is using more direct strategies. We actively recruit people to come in and be a part of this industry, through employment, entrepreneurship, consulting, and collaborations.
We have also created the BIPOC Cannabis Business Network, a community where members can exchange services, network, and collaborate. It’s all about creating more opportunities for BIPOC professionals and business owners, and it’s a safe space to share your experiences and to ideate. Similar to your Cannabis Quality Virtual Conference, where there was a dedicated space for BIPOC folks to be seen and heard and tell their story through your virtual panels, we use our resources and network to help advocates for equity and access be seen, heard, and find opportunities to thrive as a business owner or professional.
CIJ: How do you hope BIPOCANN will be embraced by the cannabis community?
Ernest: I think it has been received well in its first quarter of business. We have had opportunities to share our story across a lot of platforms, including multiple cannabis industry conferences, podcasts, and interviews with varied media outlets. We are in startup mode, so currently we are about building a brand, being seen, and helping people understand what we are trying to achieve. We are working towards that right now. We have had some success and folks are supporting our vision and goals.
I am hoping the cannabis industry will look at BIPOCANN as another important resource within the social equity, business development, and networking landscape. I don’t want to be seen as a competitor to the organizations and individuals who have been doing similar work in this space, for much longer, but as an ally. Some of our approaches to bring new people into the industry will include strategically aligning communities and markets where we have strong ties – such as state governments, national nonprofits, and global cannabis networks.
CIJ: Where do you see the cannabis industry making progress with respect to diversity and including people of color?
Ernest: When I look at the types of conversations and coverage the industry is having, even compared to last year, it seems like more conferences, media entities, brands, and individual leaders are tuned in and trying to figure out how they can contribute to making this industry better, more equitable and more accessible. I am seeing a lot of more attention, attempts to understand where the gaps are and what to do about it.
When I take a step back to think of all the virtual conferences that have made dedicated conference tracks or even entire programs – like the National Association of Cannabis Business’ Social Equity Conference, the Emerge Canna Conference, the Cannabis Sustainability Symposium, and the Cannabis Industry Journal’s post-election social justice panel – or weekly segments from Black leaders like Dasheeda Dawson (She Blaze) and Tahir Johnson (The Cannabis Diversity Report) — those are good signs. They are creating opportunities for voices representing underserved communities in cannabis to share their perspectives and be advocates for change.
But there is still much to do and that includes greater education about the realities, histories, and challenges BIPOC and other minority communities are facing. Going back to the NACB, they recently drafted a social equity standard for state legislatures to use as a baseline for crafting policies and provisions for social equity programs. That and resources from organizations like the Minority Cannabis Business Association, Supernova Women, Cannaclusive, Minorities for Medical Marijuana, and the Massachusetts Recreational Consumer Council, for example are some useful resources for the industry.
Wana Brands is also continuing to do good work, and it was exciting to see them become the first sponsor of the inaugural Black CannaConference by the Black CannaBusiness Magazine. That was a great example of an industry leader using their dollars, marketing resources, and company values to support an event specifically dedicated to creating, developing, and enhancing Black entrepreneurs and businesses in the cannabis industry.
“It is hard to know what even a year from now will look like.”On the policy front, we just saw on election day cannabis having a ton of success at the polls, passing in every single state where there was a ballot measure.
Arizona did a good job with having social equity provisions directly included in the language on their ballot measure. I think for the states that have yet to draft a social equity program, they can look at what has worked well in some other states and also look at what has not worked well, like loopholes that invite predatory behaviors.
I’m excited to see that Governor Ralph Northam and the Virginia Marijuana Legalization Working Group are already identifying the best ways to make a recreational market a beneficial and sustainable one, and tackling how to incorporate social equity, racial equity, and economic equity into a future legalization bill. I am looking forward to learning more after an upcoming meeting with a Working Group member. Eventually, I hope to contribute towards any social equity efforts that will benefit my home state and hometown (a high poverty community that has been at the crossroads of America’s major civil rights movements, with a correctional facility that houses an inmate population equivalent to nearly 10% of the town population).
CIJ: Where do you see the industry moving in the next five years?
Ernest: Ha-ha! It is hard to know what even a year from now will look like.
Just this week the United Nations rescheduled cannabis, which is a big deal! We also saw the U.S. House of Representatives pass the MORE Act. We are inching closer towards federal legalization in the US and I think it will happen within that five-year timeframe, and it will be contentious. There will be compromises on things some folks don’t want compromises on, there will be more big money influencing the outcomes of the industry, and there will be unforeseen or unintended consequences to whatever the federal legislation looks like. I recently moderated a panel of social equity license holders, who felt that federal legalization would harm the disproportionately impacted areas (by the War on Drugs) even more! Their preference was to see cannabis de-scheduled and remain under state control.
I think federal legalization will bring another wave of major mergers and acquisitions, similar to what the Canadian market experienced in 2019, benefiting big business over small business.“We need folks who are educated and informed about these matters to be at the policymaking level to have a fighting chance.”
CIJ: Do you think we can change that?
Ernest: There are so many things at play. The legislators need to have diverse perspectives and representation from the folks in the industry, especially people of color who can speak to the impact that a century of prohibition policies have had on their communities. Those voices and stories need to be heard, but that type of representation is grossly lacking on Capitol Hill…which is all the more reason we need leaders from the aforementioned communities to have a seat at the table when decisions are made.
I say that because a lot of time there are unforeseen consequences when policies are created, so decision makers at the federal level can learn from those of us already doing the work on the local level. I recently had a conversation with a former journalist and colleague who is currently in a cannabis regulatory role. We were talking about how policy and operations intersect with social equity. He made the points that “many markets implement license caps, which are intended to prevent oversaturation of cannabis business (the idea being that density of outlets impacts use rates, and particularly youth use rates); in theory, that’s a good policy – but it comes with very real consequences for social equity applicants (because those licenses often go to the wealthiest applicants). License caps also artificially inflate the cost of those licenses (for a transfer of ownership), which also harms social equity applicants. Lotteries are also generally the result of policy and usually have disastrous results for the social equity applicant.”
So yeah – the rare opportunity to define a new industry that doesn’t just do business as usual, that can right its historical wrongs, and that will reward the communities that have been most harmed by cannabis enforcement, is now. And we need folks who are educated and informed about these matters to be at the policymaking level to have a fighting chance. The optimist in me says “we can do it!” The pessimist in me reminds me that it is 2020 and people still believe the Earth is flat. I’ll keep pushing for change, but I also won’t be surprised if this perfect opportunity to get it right goes wrong.
CIJ: How can people get involved in BIPOCANN?
Ernest: The best way to get involved is to visit www.bipocann.com and support our efforts by becoming an individual member or business member. Not only does that give you the opportunity to connect directly with other members in our business network, but it gives you the chance to be the first to be notified about the latest projects, events, and opportunities we’re working on to change the industry, how we can. By joining, you also directly support BIPOCANN’s goals, contribute to the operating budget of a black-owned business in cannabis, and support the nonprofit partners who we allocate a percentage of monthly sales towards.
You can also get involved by subscribing to our monthly newsletter through the website or by following our social media accounts @bipocann. We are also available for speaking, media, or consulting projects that support social equity, diversity, and inclusion in cannabis. For those types of inquiries, please contact ernest@bipocann.com.
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In light of the maturing industry and the 2019 bust, the valuation model for acquisitions in the cannabis space is evolving from one based on sales, typically associated with emerging growth industries, to a more mature industry model based on profits or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Most cannabis MSOs have stabilized and generate positive EBITDA, which justifies the evolution away from a sales-driven model.
