According to a press release emailed this week, ASTM International’s subcommittee focused on cannabis, D37, is in the midst of developing two new standards surrounding cannabis safety and education.
One standard, WK84667, is designed to “help document engineering controls for air filtration and person protective equipment (PPE) in cannabis processing facilities,” says ASTM member Trevor Morones. The premise of this standard appears to be employee safety; with proper, standardized air filtration and PPE, the standard will help companies keep their workers safe and prevent inhalation of potentially harmful particles, like cannabis dust, stalk fiber, florescence and crystalized dust. “We are working to develop a robust community of cannabis professionals who can share their experiences in workplace and personnel safety,” says Morones.
The other proposed standard, WK84589, seeks to develop a uniform metric for “determining the intoxication level of a cannabinoid.” Initially focusing on delta9-THC, the standard will help raise awareness and promote public health and safety by informing consumers how intoxicating a cannabis product is for the average adult.
ASTM Pamela Epstein says this standard will hopefully develop a form of measurement akin to ABV in alcoholic drinks, allowing consumers to see how potent a certain cannabis product is. “Beyond providing consumers with a complete assessment of a product’s total intoxicating/impairing effects, the proposed standard may provide regulators with a methodology to meaningfully account for public health and safety,” says Epstein. “The specification can unify consumer awareness and can be used across all product types and jurisdictions.”
AOAC International, an independent nonprofit standards development organization has announced the appointment of Dr. Katerina (Kate) Mastovska as their new deputy executive director and chief science officer.
Dr. Katerina Mastovska
Most recently, Dr. Mastovska served as chief science officer for the Eurofins US Food Division. She has been an active member of AOAC for almost twenty years, winning the Harvey W. Wiley Award in 2021, their highest scientific honor. “I’m delighted to join the AOAC staff and lead the team of dedicated scientists,” says Dr. Mastovska. “AOAC has a critical role in food safety, and I’m inspired to continue to be a part of this important work.”
AOAC International works actively in the cannabis industry through their Cannabis Analytical Science Program (CASP), a working group established in 2019 that is dedicated to developing standardized methods in cannabis testing. In the world of cannabis lab testing, AOAC International creates standards under the standard method performance requirements (SMPR®) moniker, which are detailed descriptions of what analytical methods should be able to do.
More recently, CASP launched their own proficiency testing program last year and launched their first round, shipping samples to labs across the country in the Fall.
Remember those heady days of the Green Rush a decade ago, when markets were small and it seemed everyone had a chance? Now it’s more of a mad rush to get some green in the form of investment capital.
The majority of states in the country now have some type of legal cannabis market. Businesses in those states operate in spite of regulations that are restrictive, confusing and make it very difficult to make a profit. Meanwhile, heavy tax burdens, differences in enforcement techniques and varying degrees of oversight are other factors that influence bottom lines in the cannabis industry.
Saturated markets are giving businesses trouble when it comes to their bottom line
Inflation also continues to be a prominent force across world markets. Sales of cannabis products have fallen as consumers adjust to inflation and post-COVID supply chain issues that are causing higher prices on necessary staples like food and gas. An oversaturation of cannabis flower is becoming a perennial problem in some states and another factor causing industry distress.
When cash flow slows to a trickle, companies of all sizes seek out investment funding to keep their momentum. But catching the eye of an investor group requires more than just sticking your hand out.
What Attracts Potential Investors?
A company is best positioned to attract those interested in cannabis investment opportunities when it appears serious about its growth plans. That means being well positioned with a solid upper-management foundation and so much the better if there’s an advisory board in place too. A company built with a diverse group of talent—ideally from consumer packaged goods companies—presents an attractive opportunity for investors.
Talent from the CPG space can help attract investors
Top-quality and industry savvy finance employees who maintain sound financial books and establish a solid banking arrangement are also important. If the company’s financial scenario is robust enough to provide confidence in case of an audit and the books are in good shape with auditable METRC logs investors will be far more inclined to put money on the line.
A cannabis company with full inclusion (or seed to sale) is often a smart choice for investment. The vertical integration of cultivation, processing/manufacturing and retail allows them to sell their own products while also stocking other brands’ products on the floors of their dispensaries. If their products are respected and the brand is held in high regard, even better. Similarly, a cultivation enterprise that can grow crops for multiple brands can also be very attractive. The ability to pivot and adjust production to reflect the market and consumer demands indicates a strong business foundation.
Despite the current headwinds and saturated markets, other chances for growth exist. When a local municipality finally decides to “opt-in” to adult-use cannabis sales, there’s opportunity for both established brands and startups. It’s a matter of being ready for those opportunities and having a plan to leap in whenever new licenses become available.
What Businesses Will Struggle to Attract Investment?
Culture is key here. Poor employee relations and weak cohesion across departments are indicative of deeper problems. Do people actually want to work for the business? Do they feel supported by human resources? A company with underdeveloped or non-existent workers’ compensation policies and a management team that is not respected by its employees is not going to look good in the eyes of potential investors.
Non-diversified cannabis businesses are also at a major disadvantage when seeking investors. Cultivators of one type of product or service are locked into a single operation geared to do one thing. Any changes to market whims or problems with the supply chain can wreak havoc on a business based around a single product.
Stick to Business Basics
The cannabis industry is unique, but the basics of running a business well enough for success still apply. Strictly adhering to the traditional methods that any successful organization follows is extra important in cannabis. Businesses that are active in their community and make a real effort to be involved will be held in higher regard by investors. They want to see cannabis businesses that are not just setting up shop to make a quick buck, but are dedicated to bettering their community. That indicates a relationship with customers that involves mutual respect and promotes business longevity and financial stability.
Figure 1: Precision aeroponics at FarmaGrowers GMP Facility, South Africa
Every objective has to have a vision and a vector of where you want to go and what you want to achieve. “Winging it” is okay for an innovative artistic endeavor where creativity is spontaneous and one-of-a-kind art is produced. Unfortunately, that is not how one creates a top-quality cultivation operation.
Customers expect guarantees of consistency; quality assurance means a purchase is safe to consume. Medicinal products around the world require Good Manufacturing Practices (GMP) certification. These are really just SOPs that document repeatable procedures to guarantee that the most recent batch offers the same results as the first certified effort. This brief covers the importance of documented operating procedures for a successful grow business with high quality customer results.
Figure 2: The objective – trichome covered flowers, DanCann, Denmark
Almost nobody gets excited about discussing quality, but experienced manufacturers know that quality control reduces waste and improves operations. Everyone learns that they have to implement feedback, improvement and quality control procedures to guarantee profitability and longevity in any business.
So, what is an SOP? A standard operating procedure defines ‘a task’ to be performed ‘at a location by a person or a role on a specific schedule.’ These definitions will include role definition, responsibilities, personnel training, equipment & service procedures, material handling, quality assurance controls, record keeping, approved procedures & instructions, documentation, references and appendices, all of which define your business and how it is to operate.
Now, you might ask, we are just growing plants, is all this really necessary? The short answer is, it depends. If you expect to export globally, do business in Europe and other markets, get licensed by Health Canada or some day be approved to ship to other States, then yes. If you are a regional craft cannabis supplier, maybe not, but there are many tasks that are required to grow where a better documented process can benefit your operation and the quality of the product delivered to your consumers.
Figure 3: Flower maintenance, DanCann, Denmark
We provide a bulleted list of recommendations in the full white paper but to touch on a few highlights that every operator should keep in mind, SOPs define the following structures for your business.
Personnel training is done for ‘this task, in this way’ & ‘this role is responsible’
Job descriptions reduce misunderstandings and increase worker ownership in your facility. Documenting your activities minimizes task overlap and conflicts that can lead to no one executing on something that may be important but not urgent. You want to eliminate employees thinking “I didn’t know it was my responsibility.”
Consultants or visitors must be aware of and follow the same requirements as your employees if you are to maintain the quality of your grow. Specific training should be given to anyone that handles or works around toxic chemicals. Safety sheets are not just paper; They keep people alive.
Equipment & Service Procedures
Be direct and specific in your task definitions, i.e., “Use 5ml of soap, clean until no plant matter or debris remains.”
Figure 4: Full GMP certified facility, FarmaGrowers, South Africa
Ideally, grow facilities, equipment and access will be designed with cleaning in mind from the start. This is not always possible but it is the mark of successful manufacturing or production companies.
Cleaning, cleaning, cleaning: think sterile, food safety and consumer consumption protections. SOPs should define cleaning methods and materials. This cleaning is done on schedule and aligned to your preventative maintenance and calibration requirements. Precise results require precise structure for any long-term operation.
We recommend that you integrate pictures and videos in the instructions for your procedures and training so that nothing is left to chance or misinterpreted.
Material Handling, Containers, Labels, Quality Assurance
Personnel contamination/cross-contamination are the death of any grow operation. Do everything you can to limit stray or wandering plant material, dust or debris from migrating from one grow room or area to another. Isolation is a good way to limit outbreaks to a specific room to minimize losses.
Figure 5: Documented SOPs must be followed & reviewed regularly
If something nasty happens to one of your rooms. Good labeling enforced by your quality assurance team is a simple way to increase the likelihood that employees will do a task as intended. This adds to your repeatability as people change jobs or roles are redefined.
Approved Procedures & Instructions
Quality assurance is all about repeatability and intended outcomes. Documenting procedures and intended use enables every new employee to follow the experience of the masters and duplicate their success. Testing, sampling and logging your results along the way enables you to know that you are on schedule and on process, so you can predict your results every time.
Part of your continuous improvement approach will be to deal with exceptions that are not covered by your procedures. Learning about those exceptions and capturing your experience with an improved method will lead to better outcomes the next time around.
Documentation, References, Appendices
Figure 6: Flower sealed & ready for export, DanCann, Denmark
You’ve done all of this hard work to capture your operation, so you need a complete library of your reference work and approach that employees can access. It does your operation no good if you capture your methods and no one ever looks at them again. Training cycles and reviewing your defined procedures is key to a consistent high-quality result.
Hero Award
Standard Operating Procedures (SOPs), Good Manufacturing Procedures (GMP) and Good Agricultural & Collection Practices (GACP), are all terms that will become more familiar as cannabis production joins into one global market. Professional results will be required and national or international certifications will be the guarantees that any global customer can trust that a product meets the standards they expect.
We have many customers in North America and around the world. but DanCann Pharma is the most aggressive when it comes to meeting international standards and results. Producing flower that is so pure that no irradiation is required for export, the DanCann operation is fully certified for production throughout Europe and they are sold-out of capacity for the coming year. They are currently expanding their operations in Denmark and are a solid example to follow for a well-defined repeatable operation. FarmaGrowers in South Africa is a close second in this race with multiple export certifications of their own. The future looks bright for both of these global operations.
For U.S. venture capitalists (VCs), the burgeoning European cannabis market provides opportunities to break into the industry on the heels of adult-use legalization. Germany has set its sights on implementing a recreational market by 2024, and the country, along with several other European Union (EU) countries–Malta and Luxembourg–came together in September 2022 to draft a joint statement on why the EU needs a new approach to cannabis use for adult-use production, sale and consumption.
Photo: Ian McWilliams
In October 2022, Germany took further steps to solidify its plans for legalization further when its Health Minister Karl Lauterbach presented a cornerstone paper on planned legislation to regulate the controlled distribution and consumption of cannabis among adults. Such actions have signaled to both the EU and the world at large that cannabis legalization in Germany is imminent, and the country is championing the new age of cannabis policy.
With the new German cannabis market soon to be on the horizon, both foreign and domestic VCs are considering how to best leverage investment opportunities into existing cannabis companies within the current medical-only market that will transcend into adult use. For U.S. investors, it’s important to do their due diligence to find the company that will transcend into the next progression of cannabis policy. In addition, European cannabis companies must do their own meticulous research when it comes to aligning with investors to meet both their financial and business goals.
How U.S. VCs Can Evaluate Investment-Worthy European Cannabis Companies
As with any investment, VCs benefit from researching the company and market they are planning to invest in. Regarding the company of interest, it’s important to examine which part of the cannabis market the company is serving: growers, retailers, ancillary products, service providers and biotechnology companies all exist as potential investment options within the space. An investor should look into a company’s annual revenue, evaluating whether it has increased, remained steady or decreased over time. Revenue growth is often provided on a company’s income statement.
In addition to making sure they have a thorough understanding of the business model and its value proposition, investors should also familiarize themselves with the company’s management team to make sure that they are knowledgeable and experienced in both running a company and the cannabis industry. For those interested in entering the German market, VCs should consider the businesses that are currently key players in the country’s medical cannabis industry and that plan to expand their services into the adult-use sector once legalization comes into play.
For example, Tilray, founded in 2014, was one of Canada’s first licensed medical producers. When Canada legalized adult-use cannabis several years later, in 2018, Tilray was one of the companies that successfully transitioned to expand its market share in Canada’s medical to the adult-use cannabis industry.
Another consideration for VCs is the reputation of the business and its leaders. Investors should seek out those who have become authorities within the industry and the movers and shakers who are providing key insights into the market. These business leaders should be front and center, discussing everything from current operations and compliance to cannabis policy and legislation to new endeavors and growing their businesses. With recreational cannabis legalization being a completely new endeavor for the EU, it is important for leaders within today’s European medical space to be visionaries for the next phase of cannabis legalization and be guides for creating regulations for this new market to be safe, sustainable and scalable.
In addition to executive teams, VCs should check if the business is meeting the current marketplace’s expectations and is ready to adapt and evolve as needed. This means that the company has access to a steady supply of high-quality cannabis at an affordable price and access to consumers (medical patients) and potential consumers. With adult-use legalization soon to be a reality in Germany, investors must consider which players in the medical-only market will be able to not only survive the transition but grow to become leaders in Germany’s new recreational market and within the EU as a whole.
What Do European Companies Look For in Terms of U.S. VCs
Just as VCs must find the right fit for them in terms of investments, cannabis companies must also align with investors that help them meet their financial and business goals. For cannabis companies, many seek to align themselves with VCs experienced in consumer, technology, and healthcare investments. While there are benefits to working with a VC with a cannabis background, companies should not deter investors who do not meet those specific criteria, as the cannabis market is still a fairly new and ever-transforming industry. In light of this, it’s important that investors approach opportunities with an open mind for both the industry’s current state and its potential.
The European Union
As with most investments, both VCs and companies should be prepared to agree to a term sheet, a document that outlines the relationship between the investor and the business. An ideal investor would need to be supportive, well-connected, and add value by providing relevant business knowledge. While some investors seek a more hands-on role, in most cases, the VC’s support will not be equal to the business’s micromanagement or control of its day-to-day operations. Generally, those responsibilities would remain with the company’s executive team.
As an investor, it’s important to be supportive of the business; be a cheerleader for the company when things go well, and lift up the business when challenges occur. In addition, offering a network of referrals and strategies to excel is key to being a good asset to the business. Also, having a diverse portfolio of companies with synergistic opportunities can be very beneficial to growing cannabis businesses.
A question many investors ask before entering the space is how much in assets they should have on hand to be considered an eligible investment size. Typically, this depends on the business and its financial needs. Small profitable cannabis businesses that want additional financing may be able to secure a bank loan, if possible, in their home countries or seek a seed investment-focused VC for some capital. Leaders in Germany’s current medical-only market are seeking investors, both from the U.S. and abroad, to partake in Series A/B funding, seeking financial partners that can help them reach a goal of $20-80M USD.
European cannabis companies are within a high-growth market, so U.S. VCs looking to enter through investment do not have to go through a private equity firm. An investor can approach companies through networking or direct outreach. It is also important to note that investors do not have to convert their assets from USD to EUR, as it is done automatically when making investments. For the first time in 20 years, the USD and EUR are about equal, so now is a great time for U.S. investors to consider making the leap into European cannabis.
As the former CEO of Partner Colorado Credit Union (PCCU), Sundie Seefried has been in the credit union space for 39 years. Established in 2015, Safe Harbor Financial is now a leading provider for banking and financial services in the cannabis industry.
Seefried founded Safe Harbor as a cannabis banking program for PCCU, and since then it has withstood scrutiny of 16 separate federal and state exams. Entering its ninth year as a cannabis banking program, they have almost 600 accounts in 20 states and have processed over $14 billion in transactions for the cannabis market. In September, Safe Harbor began trading on Nasdaq under the symbol SHFS. The company has also announced a definitive agreement to acquire Abaca, an industry-leading cannabis financial technology platform.
Seefried has seen it all in the cannabis banking world. We wanted to get her thoughts on some current events, the future of cannabis banking and lending, and what the next few years might hold in store for an industry ready to grow.
Cannabis Industry Journal:Tell us a bit about yourself. What is your background and how did you find yourself in the cannabis industry? How did you get to become president and CEO of SHF?
Sundie Seefried, President & CEO of Safe Harbor Financial
Sundie Seefried: I’ve been in banking in the credit union space since 1983. I became CEO of Partner Colorado Credit Union in 2001 and stayed there for 21 years. Everything I do, I have a very conservative nature just from being in the banking world and doing things methodically and building good foundations that endure long term. In 2014 when FinCen issued guidance, I was supposed to retire, and I had dinner with some old friends that were attorneys who couldn’t get bank accounts for their clients in the cannabis industry. They asked me to help and I looked into it for them. I assumed the regulator would shut me down but he didn’t; he actually encouraged me to move forward and look further into things. As I educated the board, we saw just how unsafe Colorado was and the serious need for the community to figure things out with respect to banking and cannabis. Coming from that credit union perspective, I said I think we can do this, let’s try and I’ll go through the third parties necessary. And that’s how we got into this, just looking to try and help solve Colorado’s problems and get banking access for cannabis companies.
CIJ: Tell me about your company’s mission. What is your financing strategy in cannabis and of the companies you do business with, what do you look for most?
Seefried: Our mission remains the same, and that is to normalize banking in the cannabis industry as much as possible. Because the black market still exists, the issue becomes sorting the legal entities out from the illicit actors in the industry. We know that the illicit market is trying to hide amongst the legal environment, which really makes things difficult for upstanding cannabis businesses. We can normalize banking by making sure we help legitimize the compliant entities and sort out the bad actors. We really only want to work with legitimate players with licenses, who are fulfilling expectations on the regulatory level and have no problems with compliance. We have been able to do that on the depository side.
We have always been a low-cost provider and our clients count on that. As we move into the lending part of the industry, we’re looking to do the same thing. There are lenders who charge one-to-three percent per month, 18 to 36 percent per year. We, on the other hand, are targeting more of an eight to thirteen percent annual rate. More of a conservative approach. Real debt underwriting. No extremely high interest rates. We look for the collateral, we look for well-organized businesses and solid documentation. Those are the businesses we are trying to bring into the fold and offer them normal loans. Cannabis will always have a premium on it simply because it is illegal at the federal level and there are additional hoops we have to jump through. Because of the potential forfeiture and seizure, if there are bad actors, etc., it really behooves any clients coming to us to also place their depositary services with us so we can prove their legitimacy and provide loans to them.
CIJ: Let’s talk about the Canopy Growth news. They announced they are pulling the trigger on acquiring Wana Brands, Acreage Holdings and Jetty Extracts, under the Canopy USA holding company and ahead of federal legalization. On the surface, it looks like they are bypassing a lot of the hurdles American cannabis companies currently face with financial red tape. As a foreign company trading on the NASDAQ dealing with a schedule 1 substance, do you expect Canopy to have a significant, some would say unfair, competitive advantage with their early entry? Or is this perhaps more of a rising tide lifting all boats scenario? What effect will this have on the current market landscape?
Seefried: I find it a very interesting move on their part. Certainly, they have a big advantage in comparison to other companies. The consolidation in the industry is moving so quickly. Other players will keep up with this just as fast as Canopy is moving in. That’s my opinion in terms of what I see in the consolidation area of the market. I think what it really hurts is small businesses. My heart goes out to them. So many of them worked so many years to build excellent small companies with boutique shops, and this whole move will really change that part of the industry.
I see a lot of these small players, non-vertically integrated companies, being impacted in a negative way due to such mass consolidation and the entry of foreign businesses. We need to get more competitive on a global level in order for our companies to grow and thrive. This happened back in 2018, when so many companies started doing those reverse takeovers onto the Canadian Securities Exchange and suddenly, they were putting tens of millions of dollars into the U.S. market. People didn’t see that as a competitive disadvantage for American companies, but now this move by Canopy may really show that we have to look at things more globally.
CIJ: Biden’s announcement regarding the scheduling review for cannabis has a lot of industry folks very hopeful that federal legalization is closer to a reality than before. Do you share their optimism?
Seefried: Closer than before, yes. But how close? I am not convinced it will happen quickly. If they are really going to consider rescheduling or descheduling, everything happens in Washington very incrementally. Eight years and seven attempts at the SAFE Banking legislation and still no movement on that front. Tomorrow, we’re going straight to legalization? I have a hard time swallowing that one. I just don’t see that big of a jump all at once. I think it is interesting coming just before the midterms and votes are really needed now more than ever.
What Biden did was a great start. Especially for those people in prison for possession. The interesting part of it is, we are very serious about people who have used it, but the people who have sold it and are in prison might be in the same situation. Given how the laws worked for so long, just based on the amount of cannabis you had could get you automatically labeled as a dealer, which isn’t the case for a lot of incarcerated folks.
The fact is, the social equity and justice issue, who do you free or who do you not free from prison, is a very difficult issue to get through. I think it is a great step forward and it will help some people who were treated unjustly, but there is still a lot of work to be done.
“I believe we’ll start seeing pressure from the global market on the United States to move things along a little faster in our own country.”As far as rescheduling, if they go from a Schedule I drug to a Schedule II drug, that will do no good, but it certainly is a bone to throw to the industry if you want to look like you are making some progress. Schedule II is still subject to 280E tax code so it will only do so much. If they want to make things more equitable and actually level the playing field, they have to do something about the 280E issue hindering every cannabis business in the country.
As far as full legalization, I am not optimistic because of all the players that need to be involved. Full legalization will require a change to the IRS tax code 280E as well as other tax issues. I think there are too many players: The DOJ, FinCen, the DEA, the FDA, the IRS. All of these agencies will have to agree on full legalization and moving forward in unison. The DEA is trying to fight illicit actors and illicit drugs. FinCen is trying to follow the money to find illicit actors. As long as there is an illicit market it will make their job tough, and on top of all of that, we have politics in play. That is just my take on legalization. It is going to be a much more complex problem than just legalizing the plant and moving on. Rescheduling seems like lower hanging fruit, but they will have to move it higher than a Schedule II.
CIJ: With the midterm elections here, there are a number of legalization measures in a handful of states, along with political control of Congress on the ballot. How do you think a Republican or Democrat controlled Congress will affect cannabis legalization progress?
Seefried: I just finished doing some lobbying in September in DC and spoke to some Senator offices in person, and I heard a lot of interesting topics being discussed. One of the things that keeps popping up is that social equity and justice is a huge issue. If we can’t solve this injustice in our system that has been going on for decades and decades, maybe they’ll hold banking legislation hostage. You can’t correct 50-60 years with one piece of legislation. Everything has to be incremental, unfortunately, so there will be some give and take there. I think that was a primary focus, especially with the Democrats and I do think it is a worthy cause.
On the Republican side, economically improving our competitive advantage as a country. They are starting to see the jobs being created and the tax revenue coming in and the growth of the industry. They will have to make that decision at some point in time whether they are going to leave the American cannabis industry behind or allow them to compete on a global level. I really think everything will move slowly and continue as it has happened in the past.
I believe we’ll start seeing pressure from the global market on the United States to move things along a little faster in our own country.
CIJ: As we inch closer to 2023, what do you expect the next year to offer for the cannabis financing market?
Seefried: I would say, with or without legislation, they’re finding greater access to banking. And the reason they are getting better access to banking is because none of us have been prosecuted for simply engaging in cannabis banking. I think we have set a precedent over the past eight years, not only us but other service providers in the industry and that we are not being prosecuted.
I see more financial institutions entering the market slowly. The second reason access to capital and banking will increase is because every financial institution in the country wants that lending relationship. In order to get there, they want to start with the depository relationship, and they don’t want smaller players presently doing it and getting all of those relationships before they enter the market. I think the competitive nature of the financial industry to land that lending relationship is going to force them into the game sooner than later.
Earlier this month, ASTM International announced that the D37 cannabis committee has approved four new standards for the cannabis industry. Just a few days ago, the same organization announced the development of a new standard that will be published soon.
According to a press release, the four new standards that are already approved will help those working in the cannabis space, as well as regulators and consumers. The four new approved standards are as follows:
D8375: This standard provides a method to establish cannabinoid content in cannabis and hemp samples. ASTM member Garnet McRae says, “the standard will help ensure products are labeled properly in jurisdictions where they are legally produced and sold.”
D8399: This standard “will aid laboratories in analyzing cannabis and hemp samples to establish pesticide concentration levels – or lack thereof – to ensure products meet regulatory requirements within appropriate jurisdictions,” reads the press release.
D8442: This standard aids stakeholders in the cannabis supply chain with quality control measurements. It provides a method for testing terpenes and cannabinoid levels using gas chromatography.
D8469: This one provides a new metals testing method for cannabis using inductively coupled plasma mass spectrometry (ICP-MS).
David Vaillencourt will be discussing standards and more at the Cannabis Quality Conference on October 17. The fifth standard that ASTM International announced this week is D8439. This one is designed “to support sound and reproducible research” by providing specifications for medicinal-use cannabis flower. ASTM member David Vaillencourt says it will help establish consistent testing for safety and quality. “With a fragmented cannabis industry marketplace, there is no common set of requirements around reporting cannabinoids and terpenes, which are the primary constituents that are linked to therapeutic benefits,” says Vaillencourt. “This lack of consistency harms public health and prevents evaluation of product safety and efficacy across jurisdictions. This standard provides a solution to this problem.”
Businesses often require outside capital to finance operating activities and to enable scaling and growth. Financing in the cannabis industry is notoriously challenging with regulatory obstacles at the local, state and federal levels. Recent market dynamics pose additional challenges for both financiers and cannabis operators.
We sat down with Travis Goad, Managing Partner of Pelorus Equity Group to learn more about Pelorus and to get his perspective on recent market trends.
Aaron Green: In a nutshell, what is your investment/lending philosophy?
Travis Goad: Our investment and lending philosophy is focused on being honest, upfront and doing what we say we’re going to do for both our borrowers and our investors. At Pelorus, we lend against cannabis-use real estate assets.
Every lender in this space is a hybrid between real estate and corporate lending. However, if you think about it as a political spectrum, with one side being pure real estate lending and the other pure corporate lending, Pelorus is as close as you can be to pure real estate lending in this sector while also being properly collateralized. What sets us apart from our recently launched lending peers is that we lend against the real estate asset value only, even though we’re collateralized by the real estate and license.
We lend between 60% to 75% of the value of the real estate, which means sponsors need to raise equity for the 25% to 40% remainder of the project cost. This allows us to be covenant-lite for our borrowers while giving them the flexibility to grow their business as they see fit.
Travis Goad, Managing Partner at Pelorus Equity Group
The other lending options in the space are much different. While our lending peers may call themselves mortgage REITs, they really are based on a business development company (BDC) lending model. While they may lend borrowers as much as 150% to 180% of the real estate value, they will require significant financial covenants, require control of major decisions and most often want a board seat. We’ve seen this model severely hamstring growth of companies.
The third option available to sponsors is a sale-leaseback. In this structure, lenders will buy your real estate for 100% of the value, but require you to enter into a 15-to-20-year lease that increases 3% each year. There is a temporary benefit to this model from a federal tax perspective, but that will go away when 280E is addressed, either by descheduling cannabis or amending the tax code.
While this structure means you don’t have to raise equity, it gives up the most valuable asset cannabis companies have in the early stages of the industry. Once you sell this asset, it hampers optionality for sponsors – and in a fast-growing industry like cannabis – optionality is the most critical thing a company has. Pelorus’ structure allows maximum optionality, as well as the ability to lower your cost of capital as the industry matures.
From an investor standpoint, they should know that the BDC and sale-leaseback models are a lot riskier than our model. While we’ve seen those models work well in mature industries, we think the cannabis industry is too early-stage and too volatile to go that far out on the risk spectrum. We have the longest history in the space of deploying capital successfully and seeing it returned. Prior to making any loans, we spend a lot of time underwriting the company we’re working with, the real estate and the projections. We look for strong sponsors, great projects and attractive markets.
Before we entered the cannabis lending space, our team at Pelorus had more than 5,000 transactions under our belt, worth $5B, and we leveraged our decades of underwriting experience when starting the Pelorus Fund. As the first dedicated lender in the cannabis space, we have more data and experience than anyone in terms of transactional volume – we’ve looked at more than 2,000 deals and have made 71 deals, worth $468M. We know the intricacies of every market, the particular ordinances, what the costs should be, and utilize the data to help our borrowers succeed. Through our deals and sustained success, we’ve made a name for ourselves as the most trusted and efficient lender in the cannabis space.
Green: What types of companies are you primarily financing?
Goad: We finance construction and stabilized loans for a range of clients including MSOs, SSOs and ancillary companies. We don’t lend on outdoor cultivation, but are open to working with any cannabis-related business that has commercial real estate, strong financials and experience in the cannabis space. Today, our sweet spot is closing loans in the $10M to $30M per transaction range, but we can fund loans $100M+ and as low as $5M. Since 2016, we’ve financed 4.2M feet of cannabis-use properties for a total of $468M in loans – roughly 15% to 20% of the entire US market.
Green: What qualities do you look for in a cannabis industry operator or operating group?
Goad: We are meticulous in our underwriting process and underwrite the company, the real estate and the market. We’re one of the few lenders today that has capital to deploy, which has given us the opportunity to continue to take market share while also increasing the quality of our borrowers. Whether you’re an MSO, smaller state operator or ancillary business, we recognize quality across the sector. Brand affinity and shelf space are critical in this market, and we like working with companies that have a competitive edge in getting their branded product to customers. We try to target companies that offer a unique product, or have a unique position within the state they are located.
To qualify for our lending program, borrowers need to own their real estate. If the sponsors own the real estate or intend to own the real estate, we offer two main lending products: we provide construction loans that range between 60% to 75% of the project that are typically 18-month terms; and more recently implemented, we also lend on fully stabilized assets that are cash flowing and operational up to 75% of the value and up to a 5-year term.
By the time a borrower comes to us, they should already have a license (or be acquiring a license at closing), have their required equity raised to completely fund the project and have all local approvals to begin construction.
Green: Capital market dynamics have led to significant public cannabis company revaluations in 2022. How has this affected your business?
Goad: As far as how market dynamics have impacted our fund, we’ve been pretty insulated because we are a privately held company. From our inception, we’ve worked hard to create an innovative model, and have had many firsts. We were: the first dedicated lender in the cannabis sector; the first lender to become a private mortgage REIT; the first to be issued an FDIC warehouse line of credit; the first to get an investment grade rating; the first to issue an unsecured bond with institutional investors; the first to update our fund to a billion dollars. Amid all these firsts, we made a conscious decision not to go public. This has been one of the best decisions we’ve made and has shielded us from much of the market volatility we are seeing.
As for the broader market, we’ve seen our sponsors that are publicly traded impacted pretty significantly by the recent market dynamics. We’ve also seen flow-on effects for non-publicly traded firms. Our loan book is performing excellently, but we’re in a very challenging market for marijuana-related businesses to raise equity, making debt even more attractive. For most of our competitors, who chose to go public, they’ve been unable to raise much capital to deploy, whereas our market share is increasing and we continue to grow in this tough environment. We remain bullish on the sector in the medium/long term and are finding excellent opportunities to lend in this challenging environment.
Green: Debt on cannabis companies balance sheets have increased significantly in recent years. What is your perspective on that?
Goad: Increased access to debt capital markets is a sign of a maturing market. The U.S. cannabis sector has a great tailwind with growth of new markets, but it’s facing some significant headwinds tied to tax inefficiencies and inadequate state-level enforcement. All of these issues can be solved with political action, but so far that hasn’t happened and it’s causing pain in the industry. These industry dynamics are set against a broader macro backdrop of risk-asset repricing and increased volatility, which leads to outsized volatility in cannabis due to limited liquidity. That increased volatility has made it very challenging to raise equity in this market.
For companies that have strong assets on their balance sheet, they’re still able to access capital via the debt markets. This is creating clear winners and losers, as companies that choose to sell their real estate have significantly fewer capital raising options than those that choose to keep real estate assets on their balance sheets. Overall, this increased debt trend has been great for our business – our pipeline has increased rapidly and we’re able to lend to strong operators with solid assets at attractive rates for investors. Our fund continues to have inflows, and since we’re one of the few lenders with capital to deploy, we’re still open for business and deploying capital in this challenging environment.
Green: How does the lack of institutional investor participation in the cannabis industry affect your business?
Goad: The current regulatory environment impacts the type of investor that comes into this space. Rather than being dominated by institutions, this sector has largely been funded by retail investors and family offices. This has created challenges in aggregating large amounts of capital, both on the operator and the debt-fund side of the business. It can lead to delays in loan closings, as it takes borrowers a longer amount of time to raise the required equity to close their transaction. As we’re seeing with our publicly traded peer group, it can also lead to lenders having trouble raising capital to deploy. As for Pelorus, we’ve been very fortunate that our length of time in the industry and track record of successfully making loans and having them repaid has set us apart in fundraising. Our decision to stay private has been a critical factor in our fundraising success as well. Overall, the lack of institutional investor participation is a double-edged sword: the lack of liquidity has caused challenges broadly, but since we’ve had significant capital to deploy, it’s created great opportunities for us to make loans with attractive risk/returns in this challenging market.
Green: What would you like to see in either state or federal legalization?
Goad: Given the stalemate in the Senate and the sharp bipartisan divide, I don’t think federal legalization will happen during this administration. That said, there are incremental actions that the government should take to strengthen the cannabis sector. First of all, the Cole Memo needs to be reinstated to add additional protections for cannabis and cannabis-related businesses. As 280E has clearly been detrimental to the overall health of the cannabis industry, we also believe the tax code should be amended, or better yet, we should address the conflict between state and federal policy. We also need to get SAFE Banking approved in order to open up the cannabis sector to credit cards and potentially open up banking to the sector in a more material way. Unfortunately, there’s a choke point in the Senate to get SAFE Banking approved, since there needs to be 60 votes to be filibuster proof. And while there is some talk of SAFE Banking passing during the lame duck session, we are not holding our breath.
Green: What trends are you following closely as we head towards the end of 2022?
Goad: The biggest trends we’re following are on the legislative front (both federally and at state level), which heavily impact revenue and net cash flow growth for the industry. We’re following emerging state markets, such as Alabama and Mississippi, as well as current medical markets poised to transition to adult use in the near term, such as Missouri. The more addressable the population, the faster the industry can grow.
We’d also like to see current legal states address the often-heavy tax burdens that have led to additional challenges for legal businesses and kept illicit markets thriving. No state got everything right at the beginning, but we’re starting to see states address some of the inequities and harmful policies now. California has made some progress in this area, however there are many issues that still need to be addressed.
Federally, 280E is the other major headwind that needs to be addressed as extremely high tax rates are one of the biggest problems for the industry. We’d really like to see that addressed, as cannabis is the only new industry, I’m aware of in the U.S. that has had such disadvantages out of the gate.
According to a press release sent out today, ASTM International’s D37 cannabis committee has approved three new standards for environmental conditions during packaging, shipping and storing cannabis and hemp flower. The three new standards are:
Standard Specification for Environmental Conditions for Post Packaged Storage and Retail Merchandising of Cannabis/Hemp Flower (soon to be published as D8423);
Standard Specification for Environmental Conditions While In-Transit for Packaged Cannabis/Hemp Flower (soon to be published as D8432); and
Standard Specification for Environmental Conditions While Packaging Cannabis/Hemp Flower (D8450).
ASTM members will be presenting at the Cannabis Quality Conference & Expo, October 17-19 in New Jersey. Click here for more information. Jonathan DeVries, a member of ASTM, says these standards are designed for the entire cannabis supply chain, from cultivation, manufacturing and transportation all the way to the end consumers. “These standards are designed to support the safety and quality of packaged cannabis and hemp flower as it moves through the supply chain,” says DeVries. “This includes the activities following curing and drying, namely packaging, transit, and storage, until it reaches the final end user.”
When people have to make important decisions, we often consult a third party to increase our knowledge and confidence in a product. For instance, when choosing a car, an individual may weigh heavily on safety ratings and other awards from organizations such as Consumer Reports. These awards are often boasted and a heavy focus in car commercials because it tells the consumer that a third party has deemed their car valuable to own. For more than 100 years, the Association of Official Agricultural Chemists (AOAC® International) has operated in this exact manner, and has set the bar and guidelines for testing in the cannabis industry through its special program called the Cannabis Analytical Science Program, also known as CASP.
The CASP program is designed to develop standards and validation guidance to evaluate testing methods, as well as the methods’ ability to detect the target organism or compound on the cannabis matrix. With the addition of new states permitting the legal sale of both medical and adult use cannabis and no federal governing body overseeing testing regulations, the value of AOAC cannot be understated, as these guidelines allow cannabis testing laboratories to have their own third-party reference to look to when choosing a compliant testing method to implement in their laboratory.
AOAC was founded in 1884 by the US government as the standard setting body in the country and, in 1991, became an independent association known as AOAC International, with a goal of building a reputation as an international, consensus-based standard-setting body and a conformity assessment organization in analytical sciences. As an independent third-party resource, AOAC has the Performance Tested Methods’ (PTM) and Official Methods of AnalysisSM (OMA) programs for certification of analytical testing methods in both biology and chemistry.
If analytical methods, including proprietary test kits, are deemed acceptable, AOAC provides approved certification, their seal of approval that the method works as designed. Though multiple factors are considered to determine if AOAC approval is given; accuracy and precision of the method are among the most important. For example, when validating a cannabis method for microbiology, AOAC will contract an independent testing facility to conduct a series of tests with known spiked samples to measure the recovery limit of the target microorganism. This allows the organization to determine if the method is sensitive enough to be named an AOAC-approved method through either the PTM or OMA conformity programs. Another way of ensuring the validity of results is by conducting an inclusivity and exclusivity study on a method. In this type of experiment, target organisms are tested while also spiking with non-target organisms to see if there will be a high rate of false positives.
In cannabis, discussions have grown surrounding testing of four strains of Aspergillus, which are A. terreus, A. flavus, A. fumigatus and A. niger. By spiking cannabis with one of the four Aspergillus strains and on a separate sample with a non-target Aspergillus strain such as A. clavatus, it ensures that only the target strains are being recognized and recorded on the method being tested.
This methodology limits the likelihood of unconfirmed positives occurring, ensuring the validity of the results. Of course, when a method is undergoing an actual AOAC evaluation for approval, the testing requirements for both the sensitivity and inclusivity/exclusivity experiments are much more thorough than the explanation above.
Regardless of which AOAC-approved method you select, you can feel confident that most of the “heavy-lifting” is done and that the method is accurate and precise enough to implement in a cannabis testing facility. In turn, the cannabis testing laboratory then only needs to complete their own internal method verification to ensure the method works with their processes, people, environment and product, but on a much smaller scale and aligns with state regulations.
On a consumer safety level, AOAC-approved methods are designed to keep cannabis consumers safe. Whether they are an adult using cannabis or medicinal cannabis patient, the product that is being sold should be held to the highest safety standards. By having a laboratory that is utilizing an independently approved AOAC method, an additional layer of confidence is achieved that the product being consumed is safe. This ultimately limits the number of costly recalls from dispensaries and minimizes risk to consumers. At the end of the day, cannabis testing laboratories want to keep the public safe and it is our job to do so. This means implementing these independently approved methods from agencies such as AOAC at various touch points in the seed to sale cycle to ensure the data is validated and reliable.
Overall, just as it is equally important to get a non-biased and reputable third-party approach to your automobile search, a scientist that is responsible for choosing methods in their cannabis compliance laboratory should also consider these third-party approvals. As a scientist, the goal every day is to report accurate data to help the client and the consumer equally. The cannabis compliance laboratories are the last line of defense in preventing harmful or contaminated products from getting into the marketplace and any extra assurance we have with our testing methodology is always encouraged. Ultimately, AOAC’s work is important and their standard of quality and safety is a must-have in the cannabis laboratory.
This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Strictly Necessary Cookies
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
We use tracking pixels that set your arrival time at our website, this is used as part of our anti-spam and security measures. Disabling this tracking pixel would disable some of our security measures, and is therefore considered necessary for the safe operation of the website. This tracking pixel is cleared from your system when you delete files in your history.
We also use cookies to store your preferences regarding the setting of 3rd Party Cookies.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.
The other proposed standard, WK84589, seeks to develop a uniform metric for “determining the intoxication level of a cannabinoid.” Initially focusing on delta9-THC, the standard will help raise awareness and promote public health and safety by informing consumers how intoxicating a cannabis product is for the average adult.
