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extraction equipment

Starting a Cannabis Extraction Lab? Here Are Some Key Considerations

By Martha Hernández
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extraction equipment

Cannabis sativa contains over 500 different bioactive compounds that can be separated through an extraction process. This is carried out in an extraction lab and the end result is the production of cannabis extracts with a high concentration of specific cannabinoids (such as THC or CBD) with up to 99% purity levels. Cannabis can get easily contaminated with pesticides, heavy metals, residual solvents or other contaminants and thereby pose a risk to the health and safety of consumers. In-house testing allows manufacturers to ensure that the cannabis products they put out to the market are not only potent but also are free of all sorts of contaminants.

The cannabis extraction market worldwide was valued at $9.7 billion in 2020. According to data from Grandview Research, the market size is expected to hit $23.7 billion by 2027, growing at a CAGR of 16.6%. While setting up a cannabis extraction facility can be cost-intensive at the start, the running costs are minimal, making this a profitable venture in the long run. However, you will need to consider these 7 important factors.

1. Location

7 Important Factors to Consider When Setting Up a Cannabis Extraction Facility
A schematic representation of the 7 important factors to consider when setting up a cannabis extraction facility (Figure courtesy of CloudLIMS)

Cannabis is a highly regulated industry, regardless of the country. In the U.S, it is illegal at the federal level, and therefore there’s a need for judicious selection of location to avoid run-ins with the federal government. If you are in the U.S, you will need to check the specific laws in your state. These rules dictate how close an extraction facility can be to a daycare facility, children’s park, school, residential areas, etc. The rules may also spell out how many cannabis facilities can be located in one area and how close to each other they can be. At the end of the day, you also want to ensure that the location that you settle for is readily accessible, secure and close to resources.

2. Regulatory Compliance

A cannabis extraction facility needs to meet regulations that apply to the manufacturing and production of consumable goods to ensure that the safety of workers and end consumers is guaranteed. Here are a few that are of priority:

current Good Manufacturing Practices (cGMP): The CGMP is a regulatory standard enforced by the FDA. It defines the creation, implementation and monitoring of manufacturing processes to meet the quality and safety threshold. It requires manufacturers to use technology and have systems in place to ensure product safety and effectiveness. Cannabis extraction facilities should be GMP certified for operational standardization and for performing transnational business.

National Fire Protection Association (NFPA): Extraction labs use flammable materials which can easily trigger fires. NFPA, which is a non-profit organization, has created standards and codes to minimize injuries, death, and economic losses attributable to fire accidents. The standard describes how labs should be set up and how flammable liquids should be stored and transported to prevent accidental fires.

Local Fire Codes: These are a set of codes/requirements that must be adhered to in all commercial and industrial buildings to prevent fires. They include the availability and proper use of the following:

  • Fire extinguishers
  • Extension cords
  • Smoke detectors
  • Fire exits
  • Fire signage
  • Fire assembly points
  • Sprinkler heads and pipes
  • Fire alarms

Here are some important fire codes that should be followed in a cannabis extraction facility:

  • NFPA 1: The Fire Code Handbook
  • NFPA 30: The National Code for Flammable and Combustible Liquids
  • NFPA 45: Fire Protection for Labs Using Chemicals
  • NFPA 70: The National Electrical Code
  • NFPA 58: The Liquid Petroleum Gas Code

Occupational Standards for Health and Safety (OSHA): Cannabis extraction facilities are compelled by federal law to comply with OSHA requirements for occupational health and safety, and specifically regarding biological and chemical compounds that lab staff may come into contact with during their work. OSHA standard 29CFR1910.1200 requires labs to have a written hazard safety standard for all chemicals, and the standard should be accessible to all employees at all times. Labs are required to have an inventory of all hazardous chemicals with associated details recorded in a Safety Data Sheet (SDS).

3. Staff Management

Lab staff need to train on all hazards in the facility and be given first aid measures in case of an accident. The staff will need to sign that they have received training on the same.

4. Waste Management

Cannabis waste in an extraction facility includes plant trimmings, leftover extraction chemicals, disposed of samples and other debris left behind. Waste needs to be segregated according to hazardous or non-hazardous categories and disposed of accordingly. The lab needs to put measures in place for proper waste segregation so that the waste does not get mixed.

5. Worker Safety

Worker safety in an extraction facility is of paramount importance and should be based on the kinds of risks that each staff gets exposed to in the line of duty. This makes it necessary to have a Job Hazard Analysis (JHA) to assess hazards and put measures in place to avert accidents and injuries.

Laboratory Software for CBD/THC laboratories
A laboratory software for CBD/THC laboratories to schedule staff training and manage staff competency (Figure courtesy of CloudLIMS)

6. Equipment Selection and Management

Cannabis extraction equipment can cost anywhere between $5,000 to $100,000, depending on the type and scale of extraction. When choosing the equipment, you need to factor in the cost efficiency, output, and the final product. All equipment used in an extraction lab should be Underwriters Laboratories Listed (UL-Listed). The equipment also needs to undergo regular maintenance to ensure maximum efficiency and productivity, and to prevent accidents and minimize wear and tear. National Recognized Testing Laboratory (NRTL) certification is necessary to achieve this.

7. Supply Chain Management

Supply chain management refers to the strict monitoring of the entire workflow to ensure effectiveness, eliminate wastage, and boost productivity and profitability. This means tracking raw materials from the time they are received by the extraction facility to when they are released as cannabis extracts. A Laboratory Information Management System (LIMS) comes in handy to support supply chain management in an extraction facility.

Role of a LIMS in Setting Up a Cannabis Extraction Facility

A laboratory software for CBD/THC laboratories, also known as a Laboratory Information Management System (LIMS), helps automate workflows, and thereby improve efficiency and productivity in an extraction facility. A laboratory software for CBD/THC laboratories streamlines in-house testing processes and guarantees that the final extracts produced are potent and free of impurities. A LIMS also comes in handy in managing Standard Operating Procedures (SOPs) and human resources, tracking samples and lab inventory, scheduling equipment calibration and maintenance, and ensuring compliance with the necessary regulations.

When setting up a cannabis extraction facility, sufficient time needs to be allocated to the planning to ensure all-important considerations are in place. This starts with finding an ideal and compliant location, ensuring regulatory compliance, ensuring worker safety, efficiently managing staff, inventory, and waste, and the careful selection of equipment. A laboratory software for CBD/THC laboratories ties these factors together to ensure a smooth workflow and maximum productivity of the facility.

The CLIMB Act: How the Cannabis Industry Could Benefit

By Zachary Kobrin
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The cannabis industry could receive a significant boost if the recently introduced Capital Lending and Investment for Marijuana Businesses (CLIMB) Act passes Congress. The bipartisan bill was introduced by Rep. Troy A. Carter, Sr., a Democrat from Louisiana, and Rep. Guy Reschenthaler, a Republican from Pennsylvania. It is intended to boost the cannabis industry by creating greater access to capital, banking insurance and other business services. Unlike the SAFE Banking Act (which specifically addresses banking services for the cannabis industry), the CLIMB Act was introduced “to permit access to community development, small business, minority development and any other public or private financial capital sources for investment in and financing or cannabis-related legitimate businesses.”

Rep. Troy A. Carter, Sr.

Currently, the cannabis industry faces a serious dilemma with regard to accessing not only traditional banking services, but also essential capital and financing sources. The latest member of the cannabis bill alphabet soup attempts to remedy this by addressing two key issues.

First, the CLIMB Act would permit access to key “business assistance” programs from various financial institutions by prohibiting any federal agency from bringing any civil, criminal, regulatory or administrative actions against a business or a person simply because they provide “business assistance” to a cannabis state-legal company. The CLIMB Act defines “business assistance” broadly to include, among other things, management consulting work, accounting, real estate services, insurance or surety products, advertising, IT and other communication services, debt or equity capital services, banking or credit card services and other financial services.

This provision of the CLIMB Act would immediately create more access to traditional insurance, lending and credit. This broad protection would not only apply to private entities providing “business assistance,” but arguably means that the U.S. Small Business Administration (SBA) could not be penalized by Congress or another government agency for providing loans to state-legal cannabis companies. Moreover, currently the cannabis industry does not have access to use credit cards, as major credit card companies refuse to permit such transactions. The CLIMB Act could pave the way for major credit card providers to begin permitting cannabis transactions. Permitting the use of major credit cards like American Express, Mastercard and Visa could result in an increase in sales for cannabis retailers.

The second, and possibly the most important, aspect of the CLIMB Act is that it would amend the Securities and Exchange Act of 1934 to create a “safe harbor” for national securities exchanges like Nasdaq and the New York Stock Exchange (NYSE) to list cannabis companies and would permit the trading of these cannabis businesses stock. Currently, plant-touching cannabis companies with operations in the U.S. can only be listed on a Canadian-based exchange and can also only be traded in the U.S. via the over-the-counter (OTC) markets. Trading securities on the OTC markets does not provide the same level of security as securities traded on a national exchange like Nasdaq or NYSE. Specifically, the CLIMB Act delineates that the federal illegality of cannabis is not a bar to listing or trading of securities for legitimate cannabis-related businesses.

Rep. Guy Reschenthaler

This provision of the CLIMB Act has two immediate effects. First, the CLIMB Act would allow for U.S. cannabis companies currently listed in Canada to list on the Nasdaq or NYSE. Second, this provision would allow more traditional, “blue-chip” industry companies currently listed on Nasdaq or the NYSE who haven’t been able to operate within the cannabis industry as a plant-touching entity, to enter the cannabis industry as an active participant.

In announcing the CLIMB Act, Representative Reschenthaler stated that “American cannabis companies are currently restricted from receiving traditional lending and financing, making it difficult to compete with larger, global competitors. The CLIMB Act will eliminate these barriers to entry, and provide state-legal American cannabis companies, including small, minority, and veteran-owned businesses, with access to the financial tools necessary for success.”

It is important to note that the CLIMB Act, like the SAFE Banking Act, only represents one small, but important step toward cannabis reforms. Neither proposal would legalize, de-schedule or reschedule cannabis. Rather, the CLIMB Act addresses very real-world, operational issues facing the cannabis industry. With that in mind, the CLIMB Act would certainly provide much needed clarity for issues facing all cannabis companies.

Passage of the CLIMB Act is not a forgone conclusion, but rather is quite uncertain. Other pieces of cannabis-related legislation, like the SAFE Banking Act, have passed the House of Representatives multiple times without the U.S. Senate taking any action. Moreover, the CLIMB Act was introduced with only two legislative supporters.

FDAlogo

CBD Safety in Edibles: What Regulators are Thinking

By Steven Gendel, Ph.D.
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FDAlogo

Despite the popularity of cannabidiol (CBD) infused edibles among consumers there are storm clouds on the horizon for this market. The potential threat stems from continuing uncertainty about the regulatory status of CBD in the United States (US) and the European Union (EU). Recent statements by government agencies in both areas are reminders that regulators could make decisions or take actions that would suddenly end the viability of this market. Any company that sells, or is planning to sell, CBD infused edibles such as bakery items, candy and beverages needs to understand what the regulators are thinking now and what might happen in the future.

in the US, the 2018 Farm Bill created a category of products called hemp that are derived from the Cannabis sativaplant and contain less than 0.3% tetrahydrocannabinol (THC). This law also explicitly confirmed the authority of the US Food and Drug Administration (FDA) to regulate the safety of hemp-derived infused edibles. This means CBD needs to navigate the New Dietary Ingredient pathway for dietary supplements, and either the food additive petition process or the Generally Recognized as Safe (GRAS) pathway for foods before it can be used as an ingredient in a food. All three of these processes require that someone (an individual, a company or a group) acting as a petitioner or notifier must submit safety data to the agency or arrange for a safety evaluation by independent experts.

Just some of the many hemp-derived CBD products on the market today

In the EU, CBD is regulated as a Novel Food in a process that is triggered by a submission to the European Commission. The submission must include safety data that is evaluated by the European Food Safety Authority (EFSA). In England and Scotland, CBD products are also novel foods and are evaluated using a process like that in the EU. As in the US, it is the responsibility of an applicant to provide the safety data.

The standard used by the FDA to judge the safety of new food substances in all three pathways is that there should be a “reasonable certainty in the minds of competent scientists that the substance is not harmful under the conditions of its intended use.” The standard used by EFSA for novel foods is, “the food does not, on the basis of the scientific evidence available, pose a safety risk to human health.”

It is important to realize that both in the US and the EU the safety standard for evaluating new food substances only considers the safety of that substance. The laws or regulations that define agency authority do not allow for consideration of any potential benefits. Approval (or rejection) must be based solely on the safety of the substance. Further, safety is evaluated in the context of the intended use of the substance, the planned level of use and the resulting consumer exposure to that substance.

What do we know about FDA’s and EFSA’s current thinking about CBD safety? 

Unfortunately, both the FDA and EFSA have made it abundantly clear that they believe the available scientific data does not meet the required safety standards. FDA has issued multiple warning letters to companies that sell CBD products and has rejected two NDI notifications for CBD. Although these actions were primarily based on non-safety issues (illegal health claims and the drug exclusion provision in the FD&C Act, respectively), in each case the FDA also raised safety concerns. This was done by saying that the agency is not aware of any data that would support a GRAS determination or that the products raise “concerns about the adequacy of the safety evidence.” This doubt echoes statements from the agency in public meetings and advisories. These doubts were expressed as recently as June 2022 during a meeting of the FDA Science Advisory Board.

Similarly, EFSA has stated that they feel that there are critical gaps in the existing CBD safety data. In April 2022, they published a statement with a detailed analysis of the relevant scientific literature and explicitly identified critical data gaps. EFSA said that these data gaps prevented them from evaluating CBD as a novel food.

What do the regulators see as data gaps?

Although the details of each of the data gaps are technically complex, for both the FDA and EFSA they fall into few broad categories.

FDAlogoThe first is that the agencies feel that they need better information on how CBD behaves in the human body. This is described as understanding the absorption, distribution, metabolism and excretion (ADMA) of CBD. The agencies also would like to see data on whether repeated use of CBD might cause damage to specific organs that does not occur from single exposures.

The second need is for more data related to the negative effects that have been observed in some previous work. This includes effects on the liver and reproductive system.  In particular, the agencies would like to know whether it is possible to identify a level of exposure that is low enough to not cause any negative effects. This is termed the No Observed Adverse Effect Level (NOAEL). In an ingredient safety assessment, the NOAEL is used to establish a safe intake level, called the Acceptable Daily Intake (ADI). Comparing the ADI to the expected exposure for the intended use allows the regulators to assess overall safety for a substance.  If the expected exposure is below the ADI, the substance is considered safe. Both agencies feel that the existing data do not allow them to identify a NOAEL for CBD.

The third data need relates to the composition of the CBD products used in safety studies. Food safety determinations are based on the total composition of an ingredient that is produced using a fully defined process. Even if the potential ingredient is 95% or 99% pure, a safety evaluation needs to know what is in that other 5% or 1%, and that this is the same from batch to batch. For example, the presence or absence of residual processing chemicals (such as extraction solvents) and the nature and concentration of substances such as other cannabinoids and terpenes will differ between manufacturers and processes. These differences could affect the overall safety profile for each CBD product. Therefore, it is considered important that studies supporting a safety determination for a new substance be carried out with the actual article of commerce.

Unfortunately, many different CBD preparations have been used in past studies, and in most cases these preparations were poorly characterized. This makes it difficult or impossible to combine the safety data obtained using one product with data obtained with a different product. For example, data obtained using CBD isolates from two different sources cannot be combined unless it can be shown that they were made using the same process and have the same overall composition.

What does this mean for the future?

Neither the FDA nor EFSA is likely to take any positive action on CBD until they receive safety data that fill the gaps that they have identified.

Given these data problems, it is likely that there will be little or no movement on regulatory approvals for CBD in edibles (or dietary supplements in the US) for at least several years. In the US, these products will remain in legal limbo, with state regulations playing the leading role in determining what is allowed on the market. Products with health claims will continue to be particularly vulnerable to FDA action.  The situation in the EU will be at least as confusing because, in the absence of action from EFSA, the regulatory and market status of CBD edibles will be determined by each member country independently.

In view of this uncertainty and business confusion, that are three ways that companies making CBD and CBD edibles can respond. First, in the short term, they can develop and implement manufacturing processes that ensure that their products are consistent from batch to batch and that they have the intended dose of CBD per serving or per product unit. This includes working with the analytical community and organizations such as AOAC and ASTM to ensure that there are validated testing methods available for the CBD and for the final edible products.

In the medium term, business risk management plans for companies that make CBD and CBD infused edibles should consider the possibility that new scientific data will push food safety authorities to actively conclude the CBD does not meet the current regulatory safety standards. In that case, the regulators might start to act against all CBD-containing products.

The structure of cannabidiol (CBD), one of 400 active compounds found in cannabis.

Businesses should also be aware that the agencies could make a positive safety determination but that they would use the available data to establish a low maximum allowed dose per serving or set very low limits on the presence of specific contaminants such as other cannabinoids.

In the longer term, the CBD industry as a whole might consider advocating for legislative changes. The best statutory fix is likely to be one that that regulates all cannabis-derived products in a system or agency that is separate from the food safety system. This approach is being used in Canada under the Cannabis Act. It is also similar to the way that alcoholic beverages are regulated in the US. This approach, if appropriately designed, could avoid the need for safety determinations but might also limit market access. While this approach could bring clarity and certainty to the market, it is important to remember that it will take time and effort to create a functionally system under this scenario.

There are many market reports that forecast on-going high rates of growth for the CBD market.  However, the regulatory and scientific developments that are likely to occur of the next couple of years will determine whether those projections can become reality.

Companies making these products need to monitor changes and prepare to respond to either positive or negative events.

These companies should also remember that edible products are mostly made from food ingredients using standard food product processes. It is critical that these products be made under a system that prevents food-borne hazards.

SC Labs Continues National Expansion

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

Jeff Journey, the new CEO of SC Labs

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

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

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

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

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

2022 Infused Products Virtual Conference: June Program

By Cannabis Industry Journal Staff
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2022 Infused Products Virtual Conference: June Program

Sponsored by Millipore Sigma, Berlin Packaging and Cannabis Safety & Quality (CSQ)

Click here to watch the recording

Agenda

Elevating Edibles: Defining the Next Cannabis Experience
Sam Rose, Director of Operations, Herve

Attendees will learn during this session:

  • Luxury edibles and form factor: Moving away from get high first and think about what you’re consuming second, a pivot from sugar filled, bad tasting edibles to delicious and refined ingredients. Non-juvenile form factors, healthier options, efficacy
  • Concentrates and infusion: Providing the consumer with the right high using the right ratios and concentrates. Bioavailability, highlighting the plant, absorption method (sublingual)
  • Giving the consumer what they NEED not what they WANT: We’re at a fragile point in time where people are either trying cannabis for the first time or experimenting with it again for the first time in a long time. We need to make sure these people have a good experience and not scare them away. High MG edibles and high % Flower is not the way to do this – the how high for cheap model is really toxic for the industry. We need to educate, we need to provide clean low dose edibles and more curated flower.

TechTalk: Millipore Sigma

Dr. Sunil P. Badal, Senior Scientist, Innovations/Advanced Analytical R&D, MilliporeSigma

Cannabis Beverages: The Rise of a New Market & a New Consumer
Christiane Campbell, Partner, Duane Morris, LLP

Attendees will learn during this session:

  • The current landscape and regulatory red tape surrounding cannabis beverage brands
  • Selecting and adopting a cannabis beverage brand
  • Protecting a cannabis beverage brand

TechTalk: Berlin Packaging

Julie Saltzman, Director of Cannabis Business Development, Berlin Packaging

One Symbol to Rule Them All! Harmonization is Finally Here!
Darwin Millard, Owner & Founder, TSOC LLC, ASTM Subcommittee Co-Chair

A picture is worth 1000 words, but with a hogbog of “universal” symbols, is something getting lost in translation? ASTM International’s new standard, ASTM D8441/8441M, Specification for an International Symbol for Identifying Consumer Products Containing Intoxicating Cannabinoids, serves to establish a truly harmonized international warning symbol. Learn about the significance and use of this all-important standard from one of the members of ASTM Committee D37 on Cannabis who helped developed it.

TechTalk: Cannabis Safety & Quality (CSQ)

Tyler Williams, Founder & CTO, Cannabis Safety & Quality (CSQ)

Evaluating the Safety of CBD – Data Needs
Dr. Steven Gendel, Principal & Advisor, Gendel Food Safety, LLC

Attendees will learn during this session:

  • Understanding how regulatory agencies think about safety for the ingredients in edibles
  • What we can learn from the EFSA data call
  • What is a realistic time frame for the process

Click here to watch the recording

New Non-Profit Seeks to Provide Medical Education

By Cannabis Industry Journal Staff
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The Center for Scientific Cannabinoid Information (CSCI) announced their launch on June 14. In a press release announcing their launch, the non-profit organization says they want to serve as a resource for healthcare professionals, psychologists, doctors, athletic trainers and others looking for information on the safety and efficacy of cannabinoids. The organization is focused on providing current, research-based information on cannabis.

The advisory board for the CSCI includes: Margaret Roche, a dietitian; Dr. Steven Salzman, a surgeon; Dr. George Gavrilos, a pharmacist; Joseph Cachey, an attorney and former hemp executive; Dr. David Kushner, a hospitalist; Dr. Bonni Goldstein, a physician; Dr. Kylie O’Brien, an integrative medicine specialist; and Dr. Jason Canner, an oncologist.

According to Dr. Steven Salzman, who is named as CSCI Chief Medical Officer, their organization will help fill the knowledge void in the healthcare space. “As a physician and practitioner working with cannabinoids, I’ve heard from many other practitioners who have been searching for reliable, evidence-based information on cannabinoids, and realized there was a void,” Says Dr. Salzman. “The CSCI fills this void by serving as a valuable resource where practitioners can access accurate, up-to-date information on CBD and other cannabinoids to help them gain a better understanding of this emerging field.”

The press release says that the organization will compile the latest research and clinical best practices for cannabinoid treatments and share the information with their community. The CSCI invites folks interested in medical cannabinoid research to check out their website and join their community to receive up-to-date scientific information.

2022 Cannabis Labs Virtual Conference: June Program

By Cannabis Industry Journal Staff
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2022 Cannabis Labs Virtual Conference: June Program

Sponsored by Millipore Sigma

Click here to watch the recording

Agenda

Protecting Consumer Health: The Need for More Stringent Lab Testing Rules

  • Milan Patel, CEO, PathogenDx

In this session, Milan Patel discusses:

  • The current problems with testing in the cannabis industry.  (Loose regulation and enforcement, allowing operators without scruples to endanger consumers, E.G. increasing moisture to products to increase weight, while also increasing risk of mold.
  • Potential solutions to this problem. (Bring more attention to the problem, states need to follow CGMP for recreational markets, companies should test at every step of the supply chain)
  • Why this matters (beyond protecting consumers, this will help protect the reputation of the industry and individual companies within it.)

TechTalk: Millipore Sigma

  • Maria Nelson, Technical Consultant, AOAC International

Why Use an Accredited Laboratory to Test your Cannabis 

  • Tracy Szerszen, President & Operations Manager, Perry Johnson Laboratory Accreditation (PJLA)

This presentation will educate listeners on the various aspects laboratories must meet in order to obtain ISO/IEC 17025 accreditation. This will include an overview of what the ISO/IEC 17025 standard mandates on laboratories, the accreditation process and timelines as well as best practices to become prepared for an assessment. Utilizing an accredited laboratory is critical to this market resulting in less retesting and reliable results to support safe products.

How Authenticity Testing Can Help Cannabis Businesses

  • Dr. Arun Krishnamurthy, NMR Spectroscopist, Purity-IQ

Attendees of this session will learn:

  • NMR and cannabis, an innovative analytical tool
  • How CAPS measures product quality
  • How to improve your bottom line

Click here to watch the recording

An Interview with Metrc CEO Michael Johnson

By Aaron Green
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Metrc combines a software platform with radio frequency identification technology to track plants and cannabis products from seed to sale. The track-and-trace model quickly became adopted by dozens of states to regulate their cannabis markets over the years, becoming an important standard in the industry.

With government contracts in nineteen states and counting, Metrc has become an omnipresent fixture in the United States cannabis market. States work with Metrc to provide their market’s traceability software for the entire supply chain, which helps prevent diversion to the black market, offers security and safety, aids in recalls and regulatory compliance tools.

We sat down with Michael Johnson, CEO of Metrc, to discuss retail challenges, regulations, cybersecurity, compliance and more.

Aaron Green: What are the major compliance challenges retailers face?

Michael Johnson: Major compliance challenges that retailers face will vary from state to state, however, we do see common themes across state lines. Financial services, for instance, has been a historical industry hurdle, as most big banks and credit card companies deny access to their network, making it difficult for retailers across the board – from bank account setup to limited customer and patient payment options to security issues when managing a cash-only retail business. The tides are starting to change with more credit unions and state-chartered banks opening their doors to the industry, along with new payment technologies for consumers to use instead of cash.

Michael Johnson, CEO of Metrc

We also see common operational challenges, including inventory management issues due to human error, lack of consistent quality assurance, and product theft. Retailers regularly face strict packaging, labeling, and product safety laws along with requirements for public health, storage and sanitation procedures and additional layers of security and surveillance.

Finally, access to compliant and retail-friendly technology systems is important as it can have a major operational impact. If a retailer can choose, selecting the right platform will manage all their operational needs – from ID-scanning at check-in to inventory management to banking – while properly integrating with their state’s track-and-trace technology. That’s a major benefit and one that Flowhub brings to the industry, alongside Metrc.

Aaron: How does compliance for retailers differ from cultivators and manufacturers?

Michael: It is important to note that proactive compliance sits at the center of cannabis regulation. Not only does it ensure the maintenance of license(s) and overall businesses, it helps expand and enhance the industry as a whole. As a highly regulated sector, transparent and consistent compliance initiatives provide the necessary foundation for a safe and secure environment, strengthening all levels of the supply chain and the industry at large.

All industry players must adhere to specific licensing and documentation requirements – an expired or illegal license may lead to serious fines and carries the potential of losing the business. In a handful of states, employees may need a license as well. Real estate also comes into play for all license holders, with special cannabis zoning restrictions, such as requiring distance limits between select institutions.

Since retailers are customer- and/or patient-facing, they may experience unique operational requirements compared to cultivators and manufacturers, including ID-checking policies, customer or patient delivery laws, additional packaging and labeling rules, strict dispensation regulations, in-store and on-shelf product placement, retail signage, and product promotion rules, and more.

Just like retail, cultivation and manufacturing compliance will also vary across states, but with a host of additional compliance requirements to keep in mind – for example, biological, chemical, and physical hazards are something that play a larger role at facility operations, which are subject to Occupational Safety and Health Administration (OSHA) rules. Other compliance issues to highlight on the cultivation and manufacturing side include state requirements on inventory reporting, security patrols, waste removal, and meticulous logging.

Aaron: What is your process for evaluating vendor integrations?

Michael: At Metrc, we maintain an efficient and consistent process for evaluating vendor integrations – an example of our commitment to ensuring the safety and security of legal cannabis markets.

First, integrators petition access into specific instance(s) by filling out a form with their basic information (business name, software name, contact info, etc.), along with any state-required agreements that must be signed. The integrator is then given a set of steps to perform in each instance requested. The steps provided are then evaluated by our API Support team. When all steps are performed accurately, the integrator is added into production and an API key is generated for their use. Licensees must also issue the TPI a User API key to gain access to the API. Overall, the process is a combination of meeting state, Metrc, and licensee requirements.

Aaron: Can you address the cybersecurity landscape METRC faces? What is METRC’s process for dealing with cybersecurity threats?

Michael: Cybersecurity threats are shared across industries and although not unique to Metrc or the cannabis sector, cybersecurity threats and the value of data continues to change. Maintaining strict safeguards around data privacy and the security is a top priority at Metrc and we keep a constant pulse on changes in the cybersecurity landscape, to maintain this safeguard for our customers, industry users, and Metrc as a whole.

Aaron: What trends in cannabis regulation are you following?

Michael: Cannabis rules and regulations are ever evolving, which is why it is vitally important for anyone in the industry to stay up to date. Examples of some we are following closely at Metrc include the SAFE Banking Act, Marijuana Opportunity Reinvestment and Expungement (MORE) Act, and Cannabis Administration Opportunity Act (CAOA); and more generally federal legalization, public health protection, and environmental regulations.

Aaron: What’s next for METRC?

Michael: We continue to expand our customer and user feedback loop to ensure our roadmap meets the unique needs of markets and an overall evolving industry/regulatory landscape. Examples include continued performance improvements, more robust analytics capabilities, user-driven functionality updates, and exploring the design of a more sustainable RFID tag.

An Interview with Flowhub CEO Kyle Sherman

By Aaron Green
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At its core, Flowhub is a point-of-sale and compliance software company, but they offer much more than that. After becoming the first company to integrate with Metrc in 2015, the platform quickly became a leading software company in the space.

The system helps dispensaries manage inventory, report sales data to regulators, manage payment processing, manage workflows and simplify compliance. Following a few stints at Dixie Elixirs, Weedmaps, and Neos Vape Pens where he saw the day-to-day inefficiencies of cannabis compliance, Kyle Sherman launched Flowhub about eight years ago.

As Founder & CEO, Sherman and his team have taken Flowhub to the next level, with over 1,000 dispensary partners processing $3 billion in annual sales. We caught up with Sherman to ask about compliance challenges facing the industry, 4/20 sales data, integration technology and more. 

Aaron Green: What are the major inventory and point-of-sale challenges that retailers face?

Flowhub Founder & CEO Kyle Sherman

Kyle Sherman: Cannabis has yet to be federally legalized and the industry remains a highly regulated environment that’s subject to a patchwork of state and local regulations. Dispensaries face an influx of challenges compared to traditional retailers due to strict compliance requirements. Cannabis retailers are required to report all sales activities and inventory movements to their state regulators, sometimes in real time. If physical inventory does not match what has been reported to regulators, their license is at risk for suspension. Maintaining accurate inventory records across systems (including point of sale, Metrc, and ecommerce menus) is one of the biggest struggles we hear from retailers.

In addition to compliance, lack of financial services and support from large banks and credit card companies is a big challenge for the cannabis industry. This means most transactions in the industry are limited to cash. Managing such large quantities isn’t easy and it puts dispensaries at risk of theft, both internally and externally. While cash alternatives like ACH are becoming increasingly accessible, some retailers are choosing partners with predatory financial terms or those that don’t operate in compliance.

Flowhub’s point of sale software enables a dispensary to provide best-in-class customer experiences without worrying about compliance. The software is purposefully built for the cannabis industry, focused on making the jobs of dispensary owners and staff members as streamlined as possible. Flowhub also helps dispensaries hide the complexities of a cash-intensive industry by allowing customers to use alternative forms of payments at checkout, like ACH and Point of Banking. Cannabis businesses should be able to transact as easily as if they were selling coffee and doughnuts.

Aaron: We’re about a month past 4/20, how was 2022 different and how can retailers prepare for next year?

Kyle: 420 2022 was the highest cannabis sales day in history! Dispensaries brought in twice the revenue compared to an average Saturday which is typically the busiest day of the week.

While ecommerce has become a major trend for dispensaries since the pandemic, traditional retail shopping is still by far the preferred mode of purchasing for consumers. With loosening COVID restrictions, 420 2022 saw a return to in-store shopping and in-person events. We also saw that while flower still stands as the most popular product category, customer product preferences are beginning to shift toward alternative options like edibles, beverages, vapes and concentrates.

To prepare for next year, retailers should analyze their 420 data to understand customer preferences. Dig into customer demographics to find out who was shopping, at what times, and for which products. This information can be used to curate a strategic marketing and execution plan in 2023. With many dispensaries offering similar products, it’s more important than ever to have a distinct experience that differentiates from the competition. Consider forming unique partnerships, ways to give back to your local community and how you can facilitate a shopping experience others cannot replicate.

At Flowhub, you can track your dispensary analytics from your smartphone with our mobile View app. Retailers can see real time performance metrics including sales data (track your sales, before and after-tax, by product category, average basket size, and total number of transactions), employee data (see top selling budtenders for the most recent day, week, month or quarter), and inventory data (view total identified inventory discrepancies by room, or see your most popular vendor and products at a glance). With data at your fingertips, you can stay on the pulse of your business and more adequately prepare for key dates and specific times of year, like 420.

Aaron: Flowhub was the first to integrate Metrc. What synergies were unlocked with this integration?

Kyle: Flowhub has always been involved in federal legalization advocacy. In 2014, I lobbied the CO Department of Revenue to build an open API to Metrc. Integrating with Metrc opened the door for cannabis operators to accelerate workflows, increase accuracy and simplify compliance. Prior to the API, tracking and reporting cannabis sales was painful. We were all handcuffed to manual pen and paper processes. Flowhub paved the way for other software companies to integrate to the Metrc API which is now the standard for track and trace systems in most legal cannabis markets.

Aaron: What’s next for Flowhub?

Kyle: Flowhub is strategically growing alongside the cannabis industry. We’re looking forward to supporting newly legal markets like New Jersey, where AU is now legal. We also recently integrated with Aeropay to offer dispensaries compliant ACH payments. Later this year we’ll have some major product developments coming out that I can’t disclose just yet but they’re very exciting! Stay tuned.

Cannabis M&A: Take Care of the Due Diligence Essentials

By Michael G. Lux
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As the regulated cannabis industry matures, M&A activity is expected to continue accelerating. Whether they are existing licensed businesses looking for acquisition opportunities or new investor groups seeking to enter or expand their positions in the industry, investors should recognize the special due diligence challenges associated with cannabis industry transactions.

Above all, investors should avoid the temptation to omit or short-circuit long-established due diligence practices, mistakenly believing that some of these steps might not be relevant to cannabis and hemp operations. Despite the unique nature of the industry, thorough and professional financial, tax and legal due diligence are essential to a successful acquisition.

Surging M&A activity

Over the past few years, as the cannabis industry matured and the regulatory environment evolved, M&A activity involving cannabis and hemp companies has undergone several cycles of expansion and contraction. Today, the expansion trend clearly has resumed. Although the exact numbers vary from one source to another, virtually all industry observers agree that 2021 saw a strong resurgence in cannabis-related M&A activity, with total transactions numbering in the hundreds and total deal values reaching into billions of dollars. Moreover, most analysts seem to agree that so far, the pace for 2022 is accelerating even more.

Today, many existing cannabis and hemp multistate operating companies are in an acquisitive mood as they look for opportunities to scale up their operations, enter new markets, and vertically integrate. At the same time, the projections for continued industry growth over the next decade have attracted a number of investment funds and private equity groups, which were formed specifically for the purpose of investing in cannabis and hemp businesses.

These two classes of investors often pursue distinctly different approaches to their transactions. Unlike the largely entrepreneurial cannabis industry pioneers now looking to expand, the more institutional investors are accustomed to working with professional advisers to perform financial, tax and legal due diligence as they would for a transaction in any other industry.

Among both groups, however, there is sometimes a tendency to misunderstand some of the transactional risk elements associated with cannabis M&A deals. In many instances, buyers who are generally sensitive to potential legal and regulatory risks will underestimate or overlook other risks they also should examine as part of a more conventional financial and tax due diligence effort.

For example, since much of the value of a licensed cannabis operation is the license itself, investors often rely largely on their own industry understanding and expertise to assess the merits of a proposed acquisition, based primarily on their estimation of the license’s value. This practice provides acquirers with a narrow and incomplete view of the deal’s overall value. More importantly, it also overlooks significant areas of risk.

Because cannabis acquisition targets typically are still quite new and have no consistent earning records, acquirers also sometimes eschew quality of earnings studies and other elements of conventional due diligence that are designed to assess the accuracy of historical earnings and the feasibility of future projections.

Such assumptions and oversights often can derail an otherwise promising transaction prior to closing, causing both the target and the acquirer to incur unnecessary costs and lost opportunities. What’s more, even if the deal is eventually consummated, short-circuiting the normal due diligence processes can expose buyers to significant unanticipated risk down the road.

Recurring issues in cannabis acquisitions

The most widely recognized risks in the industry stem from the conflict between federal law and the laws of various states that have legalized cannabis for medical or adult recreational use. The most prominent of these concerns relates to Section 280E of the Internal Revenue Code (IRC 280E).

Although its use is now legal in many states, cannabis is still classified as a Schedule I substance under the federal Controlled Substances Act. IRC 280E states that any trade or business trafficking in a controlled substance must pay income tax based on its gross income, rather than net income after deductions. As a result, cannabis businesses are not entitled to any of the common expense deductions or tax credits other businesses can claim.

The practical effect of this situation is that cannabis-related businesses – including growers, processors, shippers and retailers – often owe significant federal income tax even if they are not yet profitable. Everyone active in the industry is aware of the issue, of course, and any existing operating company or investment group will undoubtedly factor this risk into its assessment of a proposed acquisition target.

The challenge can be exacerbated, however, by other, less widely discussed factors that also affect many cannabis businesses. These issues further cloud the financial, tax and regulatory risk picture, making thorough and professional due diligence even more critical to a successful acquisition.

Several of these issues merit special attention:

  • Nonstandard accounting and financial reporting practices. As is often the case in relatively young, still-maturing businesses, acquisition targets in the cannabis industry might not have yet developed highly sophisticated accounting operations. It is not uncommon to encounter inadequate accounting department staffing along with financial reporting procedures that do not align with either generally accepted accounting principles or other standard practices. In many instances, company management is still preparing its own financial statements with minimal outside guidance or involvement by objective, third-party professionals. Significant turnover in the management team – and particularly in the chief financial officer position –is also common, as is a general view that accounting is a cost center rather than a value-enhancing part of the management structure.

Such conditions are not unusual in young businesses that are still largely entrepreneurial in spirit and practice. In the cannabis industry, however, this situation is also a reflection of many professional and business services firms’ longstanding reluctance to engage with cannabis operators – a hesitancy that still affects some organizations.

When customary business practices are not applied or are applied inconsistently, acquiring companies or investors should be prepared to devote more time and attention – not less – to conventional financial due diligence. The expertise of professional advisers with direct experience in the industry can be of immense benefit to all parties in this effort.

  • Restructuring events or nonrecurring items in financial statements. Restructuring events and nonrecurring items are relatively common in many new or fast-growing businesses, and they are especially prevalent among cannabis operations. In many instances, such companies have engaged in multiple restructuring events over a short period of time, often consolidating operations, taking on new debt, and incurring various one-time costs that are not directly related to the ongoing operations of the business.

The inclusion of various nonrecurring items within the historical financial statements can make it much more difficult for a buyer or investor to accurately identify and assess proforma operating results, especially in businesses that have not yet generated consistent profits. Here again, applying previous experience in clearing up the noise in the financial statements can help improve both the accuracy and timeliness of the due diligence effort.

  • Run-rate results inconsistent with historical earnings or losses. A company’s run rate – an extraction of current financial information as a predictor of future performance – is a widely used tool for creating performance estimates for companies that have been operating for short periods of time or that have only recently become profitable. In cannabis businesses, however, run-rate estimates sometimes can be unreliable or misleading.

Because it is based only on the most current data, the run rate often does not reflect significant past events that could skew projections or recent changes in the company’s fundamental business operations. Because such occurrences are relatively common in the industry, the results of run-rate calculations can be inconsistent with the target company’s historical record of earnings or losses.

  • Historical tax and structuring risks new owners must assume. Like many other new businesses, cannabis operations often face cash flow and financing challenges, which owners can address through alternative strategies such as debt financing, stock warrants, or preferred equity conversions. Such approaches can give rise to complex tax and financial reporting issues as tax authorities exercise their judgment in interpreting whether these items should be reported as liabilities or equity derivatives. The situation is often complicated further by various nonstandard business practices and the absence of sophisticated accounting capabilities, as noted earlier.

As a consequence, financial statements for many cannabis companies – including a number of publicly listed companies – often contain complex capital structures with numerous types of debt warrants, conversion factors and share ownership options. Although an acquisition would, in theory, clean up these complications, buyers nevertheless must factor in the risk of previous noncompliance that might still be hidden within the organization – a risk that can be identified and quantified only through competent and thorough due diligence.

Not as simple as it seems

On the surface, the fundamentals of the cannabis industry are relatively straightforward, which is one reason it appeals to both operators and investors. For example, participants at every stage of the cannabis business cycle – growing and harvesting, processing and packaging, shipping and distribution, and ultimately marketing and retailing – can readily apply well-established practices from their counterparts in more conventional product lines.

The major exception to this rule, of course, is the area of regulatory compliance, which is still shifting and likely will continue to do so for the foreseeable future. Outside of this obvious and significant exception, however, most other aspects of the industry are relatively predictable and manageable.

When viewed in this light and in light of the continued growth of the industry, it is easy to see why cannabis-related acquisitions are so appealing to existing business operators and outside investors alike. It is also easy to understand why buyers might feel pressure to move quickly to take advantage of promising opportunities in a fast-changing industry.

As attractive as such opportunities might be, however, buyers should take care to avoid shortcuts and resist the urge to sidestep established due diligence procedures that can reveal potential accounting and financial statement complications and the related compliance risks they create. The unique nature of the cannabis industry does not make these practices irrelevant or unnecessary. If anything, it makes professional financial, tax, and legal due diligence more important than ever.

Crowe Disclaimer: Qualified organizations only. Independence and regulatory restrictions may apply. Some firm services may not be available to all clients. Given the continued evolution and inconsistency of various state and federal cannabis-related laws, any company should seek competent legal advice relating to its involvement in the cannabis industry, including when considering a potential public offering as a cannabis-related company.