The cannabis industry is an unprecedented industry and one under constant review and control. Following the November 2020 elections, fifteen states and Washington DC have legalized adult use cannabis, a number that will continue to grow as legalization slowly becomes more widely adopted in other states. Beyond that, a continuously growing number of states allow residents to purchase legal medicinal cannabis, and many have also decriminalized adult use. However, it still remains a Schedule I substance under the Controlled Substances Act and is therefore illegal on all accounts at the U.S. federal level, which creates a number of issues for businesses in the cannabis industry duly operating in states where it has been legalized.
Not only is it difficult for cannabis companies to avail themselves of alternative banking solutions, but there are also obstacles in place preventing these companies from taking advantage of notable tax deductions. The primary obstacle being Internal Revenue Code (IRC) Section 280E.
What is Section 280E?
Section 280E is a relatively short code section, only 77 words to be exact, but it carries significant weight and can have a debilitating effect on the taxable income of marijuana [sic] related businesses (MRB). Section 280E of the IRC prohibits taxpayers who are engaged in the business of trafficking certain controlled substances, including cannabis, from deducting typical business expenses associated those activities. Section 280E, which was enacted in 1982 during the “War on Drugs” era, has become increasingly relevant for cannabis businesses. The cannabis industry has grown substantially in recent years with annual market values expected to reach $30 billion by 2025.
However, while Section 280E greatly restricts the tax deductions of state-legal cannabis businesses, there is some reprieve. Current IRC provisions permit state-legal cannabis businesses, including growers, producers, wholesalers or retailers, to deduct the Cost of Goods Sold (COGS) in computing their US federal income tax liability, despite the application of Section 280E.
Impact of Section 280E on Businesses
What does Section 280E mean for cannabis businesses today? It is intended to prevent dealers from claiming tax deductions for their business expenses, interpreted to include state-legal cannabis businesses, reduced deductions that result in increased taxable income and MRBs will face higher federal tax rates.
The IRC disallows any deductions or credits paid or incurred during a tax year if those deductions or credits relate to trafficking controlled substances. The courts have taken the position that the term “trafficking” in this case means “engaging in a commercial activity – that is, to buy and sell regularly.” Simply, the law denies cannabis businesses any U.S. federal income tax deduction for ordinary and necessary business expenses, despite being duly licensed as a legal business in their state of operation.
Typically, the ability to deduct ordinary business expenses means that a business is subject to federal tax on its net income (i.e., gross receipts minus expenses). However, the definition of Section 280E and the classification of cannabis as a Schedule I substance severely hinders legal cannabis companies from taking advantage of tax deductions for actual economic expenses incurred in the ordinary course of business, which results in a significantly higher effective tax rate as compared to other businesses.
Legal Actions and Challenges to Section 280E
There have been court challenges and concessions made to Section 280E. Specifically, the 2007 court case Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner. This court case reinforced the precedence that Section 280E does not apply to cost of goods sold. The Internal Revenue Service (IRS) defines cost of goods sold to be “expenditures necessary to acquire, construct or extract a physical product which is to be sold.” Generally, for a retail MRB, this means that the direct cost of acquiring cannabis products for resale. Deductions for rent, utilities, wages, insurance and other operating costs common to ordinary businesses are generally disallowed. New York State has specifically indicated that it intends to follow Section 280E for its own income tax calculations, disallowing these same deductions against New York taxable income
Tax Court and Section 280E
The Tax Court has also been aggressive in tamping down efforts by MRBs to separate cannabis related and non-cannabis related activities. The courts argue that these separate activities constitute a single trade or business when they share a close and inseparable organizational and economic relationship. In addition, the risk of cannabis related activities tainting a taxpayer’s other business concerns exists if services or employees are shared between an MRB and a non-MRB. Allocation of expenditures to cost of goods sold, as well as any allocations of costs between MRB and non-MRB entities, need to be well thought out and supported by defensible tax and accounting positions.
The Future of MRBs and Section 280E
All indications point to an increased frequency of IRS audits of MRBs compared to audits of non-cannabis related businesses. Therefore, documenting the methodology behind the calculation of costs of goods sold is even more important for MRBs. It is vital to consult with a tax advisor to ensure you are maximizing your cost of goods sold deductions and preparing the best documentation possible to support your 280E tax positions.
Disclaimer: The information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal or accounting questions, it is recommended they consult with their attorney or accountant.
Natural cannabinoid distillates and isolates are hydrophobic oils and solids, meaning that they do not mix well with water and are poorly absorbed in the human body after consumption. Cannabinoid oils can be formulated into emulsions to form a fine suspension in water to improve bioavailability, stability and flavor. Vertosa is a cannabis infused ingredients company specializing in emulsion technologies. Their technology can be found in a range of CBD and THC containing beverages found on shelves today.
We spoke with Austin Stevenson, chief innovation officer at Vertosa, to learn more about emulsification technology and some of the challenges in testing cannabis infused beverages. Stevenson joined Vertosa in 2019 after spending time as a cannabis advisor at CanopyBoulder as an entrepreneur in residence. Prior to Vertosa, Stevenson ran the hemp and CBD analytical testing laboratory business unit for Eurofins.
Aaron Green: How did you get involved in the cannabis industry?
Austin Stevenson: I got involved in the cannabis industry nearly seven years ago, when I was an advisor to an accelerator in agriculture technology in Africa. I went to the MIT Innovation Laboratory, and I saw a whole bunch of farmers cultivating green leafy vegetables in the middle of the Kalahari Desert, which piqued my curiosity. I learned that it was all done via hydroponic indoor cultivation and freight containers. I got back to the US and put my detective hat on, and learned that it was really the cannabis industry that was driving innovation in terms of indoor and sustainable agriculture. At that point, I took it as an opportunity to dive in and started, again, as an advisor at an accelerator in Colorado. From there, I’ve been on the amazing cannabis journey.
Green: And how did you get involved with Vertosa?
Austin Stevenson, Chief Innovation Officer at Vertosa
Stevenson: I became an advisor at CanopyBoulder to a few software companies and got on the founding team there as well as at a few cultivation companies and other license types across the supply chain. Immediately before Vertosa, I ran the business unit for hemp and CBD testing at Eurofins, one of the world’s largest analytical chemistry laboratories, specializing in Ag Pharma. My clients were your traditional retailers: CVS, Kroger. Our team analyzed thousands, maybe hundreds of thousands of SKUs of infused products.
At one point I had to tell one of my clients at Eurofins, that all of their beverage SKUs were failing potency tests. Their supplements, OTC products, some of the confections, cosmetics, were all passing, but the beverages were failing potency testing. Cannabinoid ingredients were floating to the top, sinking to the bottom, even leaching into the can liners. It just wasn’t working, so we had to tell them that those beverages could not go to market. On this same day, I happened to run into my longtime friend and business partner in the industry (now Vertosa CEO) Ben Larson at a conference in Oakland, who was running the Gateway Incubator at the time, but had met our other partner and founder, Dr. Harold Han. Ben told me, “I have this PhD chemist, a surface chemist from BioRad. He’s been experimenting with techniques, taking cannabis oils and turning them into fast acting emulsions for beverages. I’d like for you to check it out because I’m considering building a business around this.” I said, “Alright, show me the technology. Let me take it back to the lab, analyze it, verify it, and then try it. See if it works.” Lo and behold, it did. I fell in love with the product. I saw the problem firsthand at my lab and now I saw a solution, so I knew that the next part of my cannabis journey would be to join Ben and Harold in building a business together focused on being the number one technology solving the problem of stability and potency for the infused beverage market.
Green: What is the core technology of Vertosa?
Stevenson: Our focus at Vertosa is being the best delivery mechanism for cannabinoids. That means that we have a portfolio of different technologies that we’re using to take cannabis oils and turn them into fast-acting liquid emulsions, as well as powder-based APIs. When we began, we were using nano-emulsification. We are using nanotechnology in the food space, with a few different methods for creating those nano-emulsions, to infuse a diverse range of different products – everything from seltzer waters to dealcoholized wines and teas.
Green: So, it’s a portfolio of products with the basic idea of encapsulating the oil into smaller components. Can you highlight some of the challenges when you were first developing the product with testing? My assumption is that it was relatively new for testing labs. How did you support method development with them so that you are accurately reporting cannabinoid content?
Stevenson: The biggest problem that we faced at Vertosa is that there’s no one size that fits all. The chemistry of an infused seltzer water is different than the chemistry of a dealcoholized wine. The reason is because, quite literally, the ingredients are different. They’re different products. When we’re making the emulsions for these beverages, all the ingredients have to be compatible – the ingredients in the emulsion as well as the ingredients in the beverage. We’ve had to design a portfolio of different emulsions for different beverage types to ensure compatibility in any scenario, otherwise there could be instability, causing separation between the emulsion and the ingredients.
Additionally, we’ve seen challenges in the packaging type as well as the manufacturing techniques, specifically sterilization, thermal processing, chemical treatment, or the lack thereof. These three core variables (ingredients, packaging, and manufacturing technique) are where all the challenges in potency testing arise. For example, you have an infused beverage that is going to be packaged in an aluminum can. There is a polarity between cannabinoids and the can aligners that ultimately could create leaching, or an absorption type of effect.
At Eurofins, we would see beverages that were supposed to contain CBD in the can but were testing at 0 milligrams, despite manufacturers confirming that they had added the CBD. All the CBD had been absorbed into the can liner. Our teams of method development chemists and management had learned to acid rinse the can liner so that we would be able to capture the cannabinoids and identify them. That was a step that we had to learn through trial and error, and we were able to bring this over and build upon this at Vertosa.
Here at Vertosa, the biggest challenge in the lab currently is that there aren’t consistent methods for analyzing beverages. Every lab has different standards, and the instrumentation hasn’t always been calibrated. To ensure that these low dose beverages are measured properly, you have an accurate LOQ to identify the cannabinoid content. Part of the challenge is that the analytical chemistry community has only started to collaborate here recently, literally in the last few months as the AOAC made a call to action for methods for beverage.
At Vertosa, we’ve had to work together with the labs and ask if they have a method for developing beverages. It’s a three-step approach: we send a lab the oil, the emulsion, and the finished product, and ensure that the accurate cannabinoid profile is being diluted across the entire chain to make sure that each step the instrumentation has been calibrated the correct way. We want to make sure that they calibrate it into the HPLC and that the correct cannabinoid profile is always consistent in the finished product. It’s a lot of intimate hand-holding with the labs.
Green: So, you took it upon yourself to go out and get the methods validated, anticipating the need for finished goods testing with your customers and partners?
Stevenson: That’s right. From the beginning, we understood that the problems we are setting out to solve are consistent potency testing and accurate dosing. We wanted to be able to say confidently that when you work with us, you’re going to pass potency tests every time. And if you don’t, we’re going to uncover the reasons why.
For us, we have been able to provide that consistent and reliable ingredient. And yes, there’s been stumbles along the way, but those stumbles are the learnings that make us better. In the beginning, we had just one formula but the chemistries of different beverages vary too much for that to work. We also know that packaging type and manufacturing processes play a role. So, we now have a portfolio of different emulsions, such as conventional, natural, and organic, that can work with any given varibale and that have verifiable potency.
We anchor ourselves to the promise that our clients will pass potency, because that’s the biggest problem most brands have.We know the ingredients inside and out – knowing how heat plays a role, how polyphenols play a role, how oxygen plays a role, and helping the labs and our brand partners succeed while minimizing all the risk and pain that they go through with failed potency. You’d be surprised how many people are using the wrong product in formulation. A new client will come to us frustrated after adding CBD isolate powder to their beverage and seeing it fail potency tests. That’s where we’re able to come in and correct the course.
Green: Someone comes in with a magic wand. What do they solve for you?
“Efficacy research is the most interesting aspect of industry research to me.”Stevenson: If I had a magic wand, I would use it to accelerate efficacy research to validate and verify specific cannabinoids/terpene formulas for targeted effects. In other words, I’d love to have a peer-reviewed, scientifically validated cannabis formula for any desired effect, like anxiety or pain relief, aid in sleep, or increased energy, for example. At Vertosa, we’re currently investing in third party academic research to empower our clients with validated information; however, it takes a lot of time, money, and effort conducting research and clinical trials. It’s a long but essential and beneficial process!
Green: What trends are you following in the industry?
Stevenson: In the world of edibles and ingestibles, I’m extremely interested in exploring onset times and bioavailability technologies, as well as trends in ingredients. More of our clients are interested in rapid onset times so that consumers feel the effects within minutes of consumption, removing some of the stereotypical hesitation around edibles and wondering when “it’ll hit.” It’s also fascinating to explore and integrate minor cannabinoids as well as active and functional ingredients and how they interact together in an ingestible.
I’m also extremely interested in keeping up with changing regulatory policy around consumption lounges and access in recently recreational states. Open consumption lounges are a fantastic solution to further normalizing cannabis usage and decentralizing alcohol in our culture, as consumer behavior is increasingly reflecting a move away from alcohol towards more health-conscious choices.
Green: What are you most interested in learning about?
Stevenson: Efficacy research is the most interesting aspect of industry research to me. Most of us cannabis professionals are passionate about the plant, and anecdotally know how cannabis can be used to improve quality of life. However, the scientific and academic community needs to see hard evidence. As we build the industry in a post-prohibition era, there is more access to research grants to evaluate the efficacy and safety of cannabis. The National Institute of Health (NIH) has identified four (4) key areas of cannabis research eligible for grant funding: (1) cannabinoid research (2) cannabidiol research (3) endocannabinoid system, ECS research, and (4) therapeutic effects of cannabinoids. It’s the latter two, ECS and therapeutic effects, that really spark my curiosity. At VERTOSA, we’re spending a lot of time and resources with our Scientific Advisory board to help accelerate this research, and I’m personally excited about the forthcoming discoveries we make, which will help our entire industry grow and thrive!
As more states legalize the use of cannabis for both medicinal and adult use, the market is growing exponentially. For growers and dispensaries, that means bringing their ‘A’ game when it comes to marketing their cannabis products – and that includes labels.
Not only do your cannabis labels need to be compliant with regulations, but you also need to make sure they stand out from the competitors. However, while creating a label seems like it should be easy, it can be a challenge to navigate the complex and murky legal landscape.
But don’t worry, we’ve got your back! Let’s take a look at the key federal regulations you need to be aware of, what NOT to put on cannabis labels and expert advice to help you find the perfect label material for your brand. Let’s get started.
Cannabis Labeling Requirements: What You Need to Know
As of now, cannabis has not been ruled legal in all 50 states. However, states where cannabis is legalized determine their own set of rules and guidelines. These legislative guidelines are constantly being updated and revised for the labeling and packaging of cannabis products, so staying compliant can be challenging for dispensaries and manufacturers.
It’s important to follow general federal regulations for your product, such as the nutrition facts section (Image: TEKLYNX)
Since packaging laws vary by state, it’s important to follow general federal regulations for your product, as well as check your state for cannabis-specific label requirements.
At the very least, you should understand and follow cannabis labeling regulations in accordance with the Federal Food, Drug, and Cosmetics Act (FDCA). Let’s dive right into the basic elements that FDCA requires when labeling cannabis products.
Name and Location of Business: It is critical to always include the name and location of your business on both the inner and outer information panel. In doing so, customers always have a way to contact you for any questions. If you are worried about taking up too much space, a QR code is a great way to offer additional information.
Product Identity: Is your product meant to be used for adult or medicinal use? You must include what your cannabis product is or does on the Product Display Panel (PDP) so it’s easy for customers to locate.
Net Quantity of Contents: Net quantity refers to the total weight or volume of a finished product (excluding packaging) and is federally mandated on labels. For packaged liquid cannabis products, net quantity should be labeled in fluid measure. Meanwhile, packaged solid, semi-solid and viscous cannabis products should be labeled in dry weight.
Warning Statements: Since cannabis is still listed as a Schedule 1 Controlled Substance, it’s recommended to include warning statements for the specific product types. For example, the warning statement should stay “for medical use only” for all medical cannabis products.
List of Ingredients: You must include a complete declaration of all ingredients in your cannabis product. This must be listed on the informational panel on the outer packaging. If there is no outer packaging, then it must be placed on the product package itself.
Disclosure of Critical Facts: In general, this includes critical information that customers would want to know when buying your product. This can include:
Suggested use for the product
Application instructions
Expiration date
What NOT To Put On a Cannabis Label
Proper cannabis labeling can ensure you remain compliant with regulations and legal requirements. Without compliance, you won’t be able to sell your products and could lead to a hefty fine – and nobody wants that! Here are the things you should stay away from adding to your label:
Unapproved Health Claims: As of now, both federal law and state laws do not recognize cannabis as a dietary supplement or substance that can help prevent, cure or treat serious diseases. For that reason, your safest bet is to stay away from making any false health claims on labels and websites.
An example of a cannabis flower label in Oregon with all of the required information.
Obscured Fonts: Text and font issues can muddle the look of your cannabis label and land you into compliance issues. Most states require cannabis labels to have a font and text size that is prominent, clear and easy to read for information panels. Therefore, it is critical to find typography that showcases your brand while maintaining compliance with federal and state regulations.
Faulty Ingredient List: Cannabis labels must accurately include the types of compounds present, it’s percentage and dosage found in the product. Plus, it is required that all cannabis products include cannabinoid profiles and provide a list of any active ingredients.
Considerations for Labeling Materials
To cut through the noise in a highly competitive retail environment, it’s critical to carefully consider the label materials for your cannabis product. Here are some things to consider.
Label Material Choice: Polypropylene or Paper
Take into account what your cannabis product is (tincture, gummies, etc.) when choosing your label material. For example, if it’s a liquid cannabis product, your label can come into contact with the liquid itself, causing damage and risk the label falling off over time. For that reason, the polypropylene label would be the better choice because it’s waterproof, oil-resistant and offers more durability. On the other hand, if your cannabis product does not require a lot of protection and you are looking for a more affordable option, then paper labels would be the better option.
Coating Choice: Matte or Glossy
Choosing between matte or glossy finish depends on your preferred brand aesthetic. If you are looking to dazzle some customers and have a vibrant design on your cannabis label, then it’s best to choose a glossy finish because it holds the ink better. As a result, your label design will appear striking and crisp when printed! But, maybe that’s not the vibe of your cannabis brand so you’re looking for something more traditional. If so, a matte finish is a better choice because it absorbs some of the ink – producing that vintage, distressed look!
Final Thoughts
Your cannabis products deserve to stand out and shine in this booming market. But your product won’t even make it to the market if you are not following label requirements. Proper cannabis labeling ensures that the product is compliant, builds trust with your customers and boosts your credibility within the space. Since requirements are constantly evolving in this new industry, you must always triple-check with both federal and state regulations for the most up-to-date information in regards to cannabis product labeling. In doing so, you’ll be able to design an enticing package with proper labels that will earn heart eyes from consumers, while providing essential information about your product.
By Dr. Markus Roggen, Amanda Assen, Dr. Eric Janusson No Comments
Many people associate cannabis with eco-friendly, counter-cultural movements, but we know the environmental impacts of the cannabis industry are significant. Given the climate crisis, cannabis production companies have a responsibility to ensure future demands of the industry are met in an environmentally sustainable way. We also know that as the world is seeing the impacts of climate change, consumers are changing their spending habits 1. As a result, companies also have the financial incentive to seriously consider implementing more environmental policies, to align their interests with the interests of consumers. Unfortunately, restrictions on cannabis research and the legal industry create barriers to implementing many environmentally friendly alternatives in production. However, this does not give us an excuse to do nothing while we wait – there are many steps that can be taken while we work to overcome these barriers. Our team at Delic Labs aims to help companies ensure the environmental and economic sustainability of the cannabis industry. So, we did some research and developed the Cannabis Better Future (CBF) concept, a guide that considers the impacts of cannabis cultivation and processing on the environment. The pillars of CBF are:
Use of renewable/recyclable materials in production
The packaging used for legal cannabis products is infamously excessive. A standard 3.5-grams of dried cannabis is estimated to come packaged in more than 70 grams of plastic. This seemingly redundant packaging is done to meet regulations surrounding cannabis packaging that often require single-use plastic with labels and warnings at specific sizes 2. Despite this, there is work being done to get biodegradable packaging approved in the industry.
More companies, such as Knot Plastic, are using plant-based materials to provide medical-grade biodegradable alternatives to single-use plastic 3. As members of the industry, we should support these companies and call for regulations to approve biodegradable packaging. As for immediate actions that can be taken, we can turn to companies that reduce the amount of plastic from the industry that ends up in landfills. The Tweed x TerraCycle Cannabis Packaging Recycling Program accepts all cannabis containers from licensed producers in Canada – free of charge – and melts down the plastic to create new products 4. This includes tins, plastic bags, tubes and bottles with child-proof caps. The program has saved more than 165,000 containers from ending up in landfills.
Upcycle biomass waste
It is estimated that for every pound of cannabis harvested, up to 4.5 pounds of plant waste is generated 5. Cannabis biomass waste can be discarded in four different ways: via landfill, composting, in-vessel digestion or incineration 6. Cannabis bio-waste usually ends up in landfills because this is the cheapest method. However, landfill disposal represents a missed opportunity for companies to use biomass waste for economic and environmentally-friendly uses.
Converting biomass for other uses will drastically limit waste
To reduce landfill waste, some companies are looking at sustainable bio-circular solutions, where cannabis biomass is converted into something of industrial use such as compost, bio-plastics and paper packaging for cannabis products 7. The easiest way to reuse cannabis biomass with current regulations in place is to upcycle it to produce compost and greywater that can be used for industrial cultivation 8. Currently, bleach is commonly used to remove THC from biomass, making it unfit to be used for these purposes 6. However, Micron Waste Technologies Inc. have shown enzymatic denaturation can be adopted on the industrial scale to remove THC from the biomass, resulting in reusable water and compostable matter 8. Turning to this alternative method would also reduce the amount of required fertilizer and replace bleach with a more environmentally-friendly solution.
Recycle production side streams
Terpenes are the compounds in cannabis that give it distinctive aromas and flavors sought after by consumers.During the cannabis drying stage, over 30% of terpenes can be lost along with the water phase from the product 9. This terpene-containing water phase gets trapped in drying rooms and decarboxylation ovens and is usually thrown out. To reintroduce the terpenes in their products, companies usually purchase them 10.However, they instead could be recapturing terpenes that are otherwise going to waste, and re-introducing them into their products. Recapturing terpenes would not only reduce the production and shipment energy that goes along with purchased terpenes, but also the costs of buying them.
There are many other wasted by-products that can be recycled. Ethanol that has been used as extraction solvent can be reused as cleaning solvent, reducing the need to purchase ethanol separately for cleaning purposes. Further, the condensation caught in HVACs can be recycled to water plants.
Optimize production energy efficiency
LED lights use less energy and omit less heat than other more traditional options
A study by Summers et al. 11 found that from producing one kilogram of dried cannabis flower, the emitted greenhouse gasses emissions range from 2,283 to 5,184 kg of CO2. Electricity used for indoor cultivation is the major culprit in producing these emissions. In fact, over $6 billion is spent annually to power industrial cannabis growth facilities in the U.S. alone12. Growing outdoors is significantly more energy efficient; however, non-auto flowering, high-THC cannabis plants depend on the specific timing of daylight (and darkness) to grow properly 13. Optimal conditions for these plants are not always achievable in outdoor setting. Meanwhile, auto-flowering plants that are hearty outdoors are generally lower in THC content 14. Promoting research into generating more stabilized cannabis cultivars may help outdoor growing be a more feasible solution. Given the recent work being done with genetically modified and transgenic plants, upregulating THC production in cannabis and increasing the heartiness in different climates is well within the realm of possibility 15–17.
In the meantime, cultivation facilities can do their part to maintain a controlled growth environment with reduced energy waste. Companies that are still using high-intensity sodium lights should consider switching to high-efficiency LED bulbs 12. These are a good alternative option as they produce less heat, and as a result, require less mechanical cooling. It has been shown that many plants, including cannabis, might even do better under blue-red LED lights 18,19. Growth under these conditions correlated with an increase in THC and CBD levels, and overall larger plants 18. In addition to low energy consumption, LED lamps have flexible mobility and a tunable spectrum range. This makes it possible to mediate the spectrum specifically for cannabis crops by controlling each spectral range and manipulating spectral quality and light intensity precisely. Finally, lights can also be brought closer to plants, to further reduce the amount of mechanical cooling needed.
Utilize high-precision processes
Reducing energy use while maintaining production rates can only be done if the process is optimized. Our own research improves process optimization in the cannabis industry. A key component of industrial optimization is reducing wasted time on various machines. For cannabis producers, this machine “junk time” can accumulate when the instrumentation is not progressing the reaction.
Reducing energy use in this case means ensuring machines are not in operation if they are not progressing the reaction. For example, many companies spend approximately two hours on the decarboxylation step because decarboxylation is always complete after two hours 20; however, decarboxylations are often complete in as little as thirty minutes 21. Companies can save energy by installing a monitor on decarboxylation systems to stop reactions once they are complete.
Reducing the environmental impacts of the cannabis industry is crucial to combat the developing climate crisis. While lifting restrictions on cannabis research and mitigating stigmas surrounding the legal industry will be what ultimately paves the way for meaningful changes toward a sustainable industry, cannabis companies cannot wait for regulatory changes to occur before considering eco-friendly practices. As outlined by CBF, there are existing actions which all companies can take to reduce their carbon footprint immediately. Delic Labs, and many other companies we have noted, aim to support companies in making these decisions for a better future for cannabis.
Bauder, P. Ry Russell of Knot Plastic️: 5 Things We Must Do to Inspire the Next Generation about Sustainability and the Environment. (2020).
Waste360 Staff. Tweed, TerraCycle Take Cannabis Packaging Recycling Across Canada. (2019).
Peterson, E. Industry Report: The State of Hemp and Cannabis Waste. CompanyWeek (2019).
Commendatore, C. The Complicated World of Cannabis Waste Generation (Part One). Waste 360 (2019).
Drotleff, L. Cannabis-based packaging and paper could reduce waste, promote sustainability. MJBiz Daily(2020).
Waste 360 staff. Micron Secures U.S. Design Patent for Waste Treatment Tech. Waste 360 (2019).
Challa, S. R. DRYING KINETICS AND THE EFFECTS OF DRYING METHODS ON QUALITY (CBD, TERPENES AND COLOR) OF HEMP (Cannabis sativa L.) BUDS. (2020).
Erickson, B. Cannabis industry gets crafty with terpenes. chemical and engineering news (2019).
Summers, H. M., Sproul, E. & Quinn, J. C. The greenhouse gas emissions of indoor cannabis production in the United States. Nature Sustainability4, (2021).
Reott, J. How Does Legalized Cannabis Affect Energy Use? Alliance to Save Energy (2020).
Ye, X. et al. Engineering the Provitamin A (β-Carotene) Biosynthetic Pathway into (Carotenoid-Free) Rice Endosperm. Science287, 303–305 (2000).
Giddings, G., Allison, G., Brooks, D. & Carter, A. Transgenic plants as factories for biopharmaceuticals. Nature Biotechnology18, 1151–1155 (2000).
Hu, H. & Xiong, L. Genetic Engineering and Breeding of Drought-Resistant Crops. Annual Review of Plant Biology65, 715–741 (2014).
Wei, X. et al. Wavelengths of LED light affect the growth and cannabidiol content in Cannabis sativa L. Industrial Crops and Products165, (2021).
Sabzalian, M. R. et al. High performance of vegetables, flowers, and medicinal plants in a red-blue LED incubator for indoor plant production. Agronomy for Sustainable Development34, (2014).
LunaTechnologies. Decarboxylation: What Is It and Why Is It Important? LunaTechnologies.
Shah, S. et al.Fast, Easy, and Reliable Monitoring of THCA and CBDA Decarboxylation in Cannabis Flower and Oil Samples Using Infrared Spectroscopy. (2021).
Managing compliance for cannabis companies remains a challenge in the United States with a constantly evolving set of regulations that differ at the federal, state, county and city level. Regulators can either fine or force non-compliant companies to cease operations resulting in setbacks for investors and operators.
Simplifya is a software as a service company specializing in cannabis quality and regulatory compliance. The company’s suite of products takes the guesswork out of confusing and continually changing state and local regulations. Featuring SOPs, badge tracking, document storage, tailored reporting and employee accountability features, the company’s custom audit software reduces the time clients spend on compliance by up to 45 percent.
We interviewed Brooke Butler, VP of Partnerships at Simplifya. Prior to joining Simplifya, Brooke worked internationally as a macroeconomic analyst.
Aaron Green: How did you get involved in the cannabis industry?
Brooke Butler: My story is a little crazy. I was working as a macroeconomic investment research analyst for developing countries and wanted to move back to the US after being gone for a long time. Oddly enough, I had gotten malaria a few times when I was living in Nigeria, and I was very sick. They couldn’t figure out anything to help me. Cannabis of all things, which was illegal there, but very easy to find, was the only thing that was able to help me eat and gain enough weight to be a functioning, healthy human again.
Brooke Butler, VP of Partnerships at Simplifya
So, I wanted to move back to the US. I have this very unique and strange skill set for figuring out regulatory and policy regimes, and translating that into advice for business owners and investors. Serendipitously, the last place I worked at was Sri Lanka and the CEO of Simplifya is from Sri Lanka. We met just based on me wanting to be friends with somebody in Denver who was from Sri Lanka. It happened that he had just started a compliance company in partnership with the present-day Vicente Sederberg law firm out of Colorado. And the rest is history. Five years later, I’m still with the company. We’ve grown from one state to now helping licensed operators of any kind in 23 states, it’s been a lot of fun.
Green: So, you joined back in 2016?
Butler: I actually joined in the middle of 2017.
Green: Can you speak to Simplifya’s product and process?
Butler: Absolutely. Simplifya was started because we noticed that when Colorado went adult use you had all these new licensees coming into the space that wanted to run a good business. They didn’t want to get shut down. They wanted to have great operations, but they didn’t know how to read through 800 pages of legal narrative and extract from that what they can and can’t do. Vicente Sederberg was going out and doing on-site compliance checks for these guys and telling them, “Hey, you need to fix these 10 or 15 things.” They’d come back in six months, and the operators were like, “Well, yeah, we still didn’t fix it, because we didn’t know how to fix it and they changed the rules again.” So, it was this constantly evolving thing.
We wanted to find an easy-to-understand set of regulatory checklists that any operator could use to gauge if they had any problem areas in their business. When they did have an inspector come by, we wanted to make it so that operators weren’t sweating bullets or worried about things like, “Well, do we have our cameras pointed in the right direction? Do we have enough video backlog? Are my employee badges in the right place? Are we having our restricted access area in the right place?” All those crazy little minute details that they have to worry about. So, that’s kind of how we got started. We were just trying to find a way to make it simpler and more affordable for anyone that’s brave enough to get a license and really operate in the legal market – not just survive – but really be able to thrive and spend more time on their business and building world-class products and less time worrying about waste disposal and how to do all these crazy things that they’re up against.
Then we moved into helping with standard operating procedures. We have these templates that we tie to the state regulations so operators can then add their proprietary steps and know that it’s built on top of a compliant foundation. But probably the most important thing we have is a great document management system that gives them a cheat sheet.
California is particularly nasty, as operators have well over 100 documents that they’re required to keep for a long time. Again, we’re trying to make sure that they have an easy way to verify that all their i’s are dotted and t’s are crossed when it comes to the million compliance requirements that they have. A lot of people, especially new entrants, think that compliance is just inventory management and as long as they take care of that, they’re good. Unfortunately, I wish that was true, but they’ve got four or five hundred very minute things that they must worry about. If they don’t take care of those, they could get shut down, or lose their license and business.
Green: Is your document management system proprietary?
Butler: We’re a software as a service company. It’s very easy to use. We wanted to make sure that whether it was a budtender or a trimmer, anyone at your company is not only going to be able to use our software very easily but understand the rules. We write everything at a 12th grade reading level. It’s distilled out of all that legal jargon that a regular businessperson doesn’t understand – and shouldn’t have to, they’re not a lawyer – and written in really simplified terms that anyone could understand. Our position for cannabis is that compliance is having all your employees do the exact same thing, every single day, the right way. And that’s not easy. It must be from the top down. Everyone on your team must be doing things the right way. Even if it’s not fun, and not very cool, they must follow all these rules and be compliant. This is how we get the privilege to actually run a cannabis business, and grow, manufacture or run a retail store.
Green: So you mentioned SOPs. Is there also a quality aspect to the service?
Butler: There is, yes. One of my favorite things about what we’ve been able to do is that our clients have been our biggest assets, because they’re telling us, “Here’s our problem areas, or what we need help with.” And what we’ve seen is, as states mature after legalization, there’s a lot more quality control, a lot more quality management. That not only just becomes important, but also gets written into the regulations. So, we do work with a lot of the quality teams to make sure that their recipes are being followed and are tied to what the state regulators have said that they’re supposed to be doing.
Green: Do you support GMP and GAP?
Butler: Yes. It’s really exciting. A couple of our technical analysts have received GMP training and certifications. As of now, we cover five states that have GMP-compliant SOPs, California being the largest one of them. All our SOPs for manufacturers in California, and in places like Massachusetts, Maryland, Nevada and Michigan are written with full GMP compliance. Those get married with all the crazy state, city and county rules.
Green: Do you provide auditing as well or is that outsourced?
Butler: We give them a tool so they can self-audit. Then we also have an audit tool that third party auditors can use. So, let’s say that you’re a manufacturer, and you want a lawyer or consultant to come and do a check on your facility. Because you’re so close to the audit, you want to make sure you don’t miss anything. You can use our software to quickly do that. The beauty of the audit reports is that they’re consistent and they make it easy to see if you have any issues as well as how to remediate them, and then how to prove that it was fixed. So, if you do have a regulator come by, you’re able to say, “Look, we’re doing our best. We are fixing issues when we find them. We have documented that all our employees are trained on these.” So, when the operators do get audited, everything should be in good standing.
Green: You have 23 different states that you’re in and hundreds of city and county jurisdictions. How do you manage change between all the jurisdictions as they’re constantly evolving?
“How do we help social equity applicants get loans and financing?”Butler: It’s constantly evolving. That’s why we’ve built Simplifya and made it a software subscription company. We will notify you when, let’s say Oakland, decides to update its waste management policy, or their security regulations. That will prompt you to log in. We make it very easy for you to see what regulations are new so you can run through and check on those things very quickly and make sure you get into compliance. It’s not easy.
Most of our staff and our team are lawyers, or regulatory analysts. They probably have the worst job in cannabis because they are literally just sifting through constant sets of regulations. They’re on the phone with regulators trying to get clarification when something changes. A lot of it is a manual process with our team, but we do have proprietary technology systems set up to help us monitor. It’s kind of a dual effort, using technology to help us as well as trying to get clarity and stay ahead of city meetings or state regulatory meetings on what changes are coming down the pipe so we’re not surprised when there are new regulation changes coming out.
Green: What in your personal life or in cannabis are you most interested in learning about?
Butler: I am most interested in the finance side of things. How can we help more of these companies get an actual bank account at reasonable rates that won’t kick them out in six months? How do we help social equity applicants get loans and financing? That’s a huge challenge that people don’t really like to talk about, but that is a big issue out there. How do we get insurance companies to cover all the things that need to be covered for a regular business that aren’t currently allowed for cannabis, again, and at reasonable rates?
As a consumer, I want an easier way to pay. I don’t want to have to worry about going to the ATM and worrying if I’ve got enough money to buy whatever new product I want. Payment processing, I think, is something that’s really interesting. We’re moving into that space at Simplifya. We’re really excited about it. We’re launching our payments product called TENDR, in November. We have some great large institutions that are excited to get back into or get into the cannabis space for the first time that I think is going to really excite people. If we can show people that these businesses are compliant, and now we can make the compliance requirements for them, the financial institutions easier, then we’re going to see better access for consumers to these types of products.
Green: Thanks Brooke. That concludes the interview.
Investors looking to gain exposure to the cannabis space have several options given the increase in the number of cannabis producers in the past decade, the recent wave of legalization in the U.S. and a rapidly expanding addressable market. However, one undervalued cannabis stock with enticing growth prospects that remains a top buy today is Columbia Care (OTC: CCHWF). Let’s see why we are bullish on the large-cap multi-state operator right now.
What is Columbia Care?
Columbia Care is one of the largest cannabis producers in the world with 31 manufacturing and cultivation facilities. It has 99 dispensary locations in the U.S. with more than two million square feet of cultivation capacity and over 300 acres of outdoor cultivation capacity.
The company’s rapid expansion over the last few years has allowed Columbia Care to increase sales from $77.45 million in 2019 to $179 million in 2020. Wall Street expects sales to more than triple to $626 million this year and grow by another 55% to $970 million in 2022. In case Columbia Care manages to meet analyst estimates, the company would have grown its revenue at an annual rate of 132% between 2019 and 2022.
While several of Columbia Care’s peers, especially in Canada, are grappling with negative margins, this cannabis company is racing towards profitability. It has already narrowed its operating losses from $81 million in 2019 to $31.5 million in the last 12-months. Analysts expect its bottom-line to improve from a loss per share of $0.48 in 2020 to earnings of $0.27 per share in 2022.
Columbia Care has a strong presence in markets such as Virginia, Ohio and Pennsylvania that provide limited licenses to cannabis producers. This allows Columbia Care to improve customer engagement and ensure repeat purchases of its products.
In the second quarter of 2021, it increased revenue by 232% year over year to $110 million. Its adjusted EBITDA also rose to $16 million, compared to a loss of $4.7 million in the prior-year period.
Columbia Care acquired Medicine Man for $42 million.
Now, Columbia Care has shifted focus to larger cannabis markets including New York, Arizona, Columbia and New Jersey. In Q2, its sales in Arizona and Illinois rose by 23% and 15% respectively, on a sequential basis.
The cannabis heavyweight recently completed the acquisition of Medicine Man, a Colorado-based cannabis producer, for $42 million. Columbia Care explained the acquisition will be accretive to its bottom-line and is valued at 4.5x projected EBITDA for 2021.
Columbia Care has improved its gross margins to 42% in Q2, from 36% in the prior-year period. Its operating costs have also fallen from $61 million to $51 million in the last year, making it one of the best cannabis stocks on the market today.
Bottom Line: Why Should You Add Columbia Care to Your Cannabis Portfolio?
Columbia Care expects its total addressable market in licensed U.S. states to reach approximately $31 billion by 2026. In the event that cannabis is legalized at the federal level, this figure will surge significantly higher. Additionally, Columbia Care is well poised to gain traction in the future and leverage existing expertise, as it already has wholesale distribution agreements in 13 operational markets.
Its capital expenditure investments continue to generate returns as the company continues to benefit from economies of scale and higher margins.
For these reasons, we believe investors should consider adding Columbia Care to their cannabis stock portfolios while it’s still trading at a discount.
Where to Begin: Leveraging Quality Systems to Improve Operations & Growth
David Vaillencourt, CEO & Founder, The GMP Collective
Kathleen May, Founders & Owner, Triskele Quality Solutions
In this session, Vaillencourt and May define what a quality system is, how to apply it in your operation and how to create an SOP that actually works for your employees and operation, and provide key metrics to senior management. Understand the key elements of a Quality System including utilizing a Corrective Action Preventive Action (CAPA) Program to identify and prevent recurring issues that hold your operation back.
TechTalk: MilliporeSigma
Dr. Stephan Altmaier, Principal Scientist, MilliporeSigma
3 Steps to Create a Compliance Culture with Operational Excellence
Dede Perkins, CEO & Co-Founder, ProCanna
This presentation discusses how to create a set of approved and easily accessible policies and SOPs that comply with both external and internal standards, how to create an initial training system with clearly assigned roles, responsibilities, and goals and how to create an ongoing training system with clearly assigned roles, responsibilities, and goals to maintain what you’ve created.
Innovation from an Outside Perspective – For the Purpose of Building Infused & CBD Product Success
Jerod Martin, Chief Research & Development Officer, CannGoods
For the cannabis industry to be successful we must start with quality research enabling us to utilize quality ingredients resulting in quality products. We should look to other industries to gain knowledge for a better cannabis industry. This presentation delves into why research matters, why ingredients matter and why quality matters.
Implementing Food Safety Management Systems in Infused Products Production Facilities
Dr. Laurie Post, Director of Food Safety and Regulatory Affairs, Deibel Labs
Participants will be introduced to Food Safety Management Programs such as HACCP and FDA mandated Preventive Controls systems, Food Safety Hazard Assessments and how to conduct them and Preventive controls and how to use them to craft a Food Safety system
The cannabinoid industry has faced an uphill battle from the beginning due to a lack of reliable scientific awareness about cannabinoids, fueled by decades of the hemp plant’s status as an illegal Schedule 1 drug. Today, scientists finally are free to explore the hemp plant’s 115+ cannabinoids and their relationships with the body’s endocannabinoid system. One cannabinoid, THCV, is currently undergoing scrupulous research.
ECS Brands is an established provider of whole-plant extracts. In the first-ever clinical trial for an organic THCV-rich extract, ECS received support from the National Institutes of Health and guidance from the Mayo Clinic to assess its potential for weight loss, anxiety treatment and other therapies using Nitro-V Hemp Extract, an ECS Brands product containing high concentrations of THCV, CBDV and other cannabinoids. Early outcomes of the 90-day, randomized, double-blind placebo-controlled human study were recently released. 100 out of 100 people lost weight, making no changes to exercise while taking the product for 90 days.
We interviewed Arthur Jaffee, Founder & CEO of ECS Brands. Prior to founding ECS, Arthur was co-founder of Elixinol, a company manufacturing and distributing industrial hemp-based products. Arthur took Elixinol public on the Australian stock exchange in 2018.
Aaron Green: How did you get involved in the cannabis industry?
Arthur Jaffee, Founder & CEO of ECS Brands
Arthur Jaffee: I originally was planning on starting a fitness equipment company. I got introduced to my partner at Elixinol, Gabriel, who my old physical therapist at University of Colorado said I had to meet. By the end of our lunch meeting, we shook hands in agreement to partner up on the fitness equipment concept. The timing happened where he got this opportunity to distribute CBD just following our handshake partnership. I didn’t know what it was at the time. He asked me if I wanted to join and get involved. I did my research into the benefits and discovered CBD’s anti-inflammatory and neuro-protective benefits, which for me was relevant given my football experience. I quickly realized what the vast potential CBD could offer with inflammation, neuroprotection and so many of the health and safety concerns arising from contact sports at the time. So, ultimately the opportunity presented itself through a friend of a friend in Australia who had a supply chain in Europe. This was right when CBD first appeared in the media in 2014. It was almost like it just fell into my lap.
I’ve been fortunate to really see that transition, and the evolution of the industry. Back then was probably the most valuable time because growth was so slow. Nobody knew what CBD was back in 2014. The primary demographic was cancer patients and epilepsy patients which presented a significant challenge to develop sales and marketing materials and communicate compliantly. Our first hire was a Medical Doctor to communicate in a more compliant fashion. I had to learn everything there was about the science and the medical research that existed at that time. For me, that was very valuable.
The valuable learning experiences from the early days of the industry is what laid the foundation today with ECS brands where we are focused on education promoting awareness of the endocannabinoid system to take it a step beyond just CBD because in order to understand what constitutes a quality product, or why CBD can have all these various benefits for people, you must first understand how the body is naturally configured to receive and respond to these amazing phytochemicals such as CBD. CBD is just one of hundreds of phytonutrients that the human body is designed to use. The endocannabinoid system is so significant in the grand scheme of things, because once you start accepting that the system is your overarching regulatory system in the body, we can start to look at the endless therapeutic potential.
Green: Being an early player in the CBD space, how would you say you’ve evolved over time to where you’re at today?
Jaffee: Innovation. That’s what really drove me to start ECS brands. Back in 2014, I originally co-founded Elixinol. After we took Elixinol public on the Australian exchange in the very beginning of 2018, there was a shift in direction away from innovation. Nearly all emphasis was placed on just doing what we’re doing better – meaning improving margins. In such a new and young industry and being a pioneer, you don’t get many opportunities to discover and create something for the first time. So, the past three years with ECS brands is with a heavy focus on innovation and technology.
Green: How do you think about innovation for the endocannabinoid system?
Jaffee: One of the early discoveries for me that was most inspiring, was research that evaluated endocannabinoid receptor sites, basically little keyholes for cannabinoids to perfectly fit in – that are made for cannabinoids. When evaluating the number of receptor sites in different individuals experiencing stress and illness it showed there was a higher concentration of receptor sites in those that were sick and experiencing systemic stress. To me, that was that was powerful because if that doesn’t communicate the body’s need for cannabinoid nourishment to heal and restore back to homeostasis as a natural and involuntary response really motivated me to play a part in getting quality cannabinoid products out to the masses and specifically those in most critical need. Our first interaction with cannabinoids is in mother’s breast milk, the cannabinoids that our bodies naturally produce. After breastfeeding, our diets are completely stripped of virtually all cannabinoids, leaving the endocannabinoid system starving, and likely leading to many of the most common and chronic health deficiencies that causes detriment to so many. Rather than cannabinoids, we then get introduced to pharmaceuticals. The writing is on the wall – this must get accepted and integrated into our society.
The Nitro-V Hemp Extract, an ECS Brands product
When it comes to innovation surrounding the public system it requires research and requires scientific evidence. It requires functional products because you can have all these great benefits, but if you don’t have efficient and effective ways of delivering these chemicals to the body, it can almost be meaningless. It’s a delicate balance between consumer appeal, functionality and efficiency when it comes to the delivery into the body. We’re focusing on delivery systems, making things more bioavailable and integrating other natural botanicals that react and influence the system in similar ways as there are more than just cannabis-derived cannabinoids that can create positive impact and ultimately alter the way that the endocannabinoid system can regulate.
Green: An important aspect of innovation is clinical validation. How do you think about clinical trials and designing clinical trials for products?
Jaffee: Clinical trials are instrumental and required to validate claims because otherwise, it’s just speculation. Directional application without the clinical evidence to support in the appropriate way is setting yourself up for failure. Designing a clinical trial is just as important as performing the trial. If it’s not set up right, it can be a waste of time and money. Trials really need to be held to the gold standard of double-blind placebo controlled and thoughtfully organized.
We did organize a clinical trial at the beginning of this year, and it was incredible. We learned so much about a unique extract of ours that’s naturally rich in THCV and CBDV. We intentionally set it up to be a very broad and encompassing study. I personally wanted to see the different mechanisms and how the endocannabinoid system responded and worked together with other systems in the body. We evaluated a broad range of measurements, with complete safety tox study – blood panels to test every organ – measuring kidney enzymes, liver enzymes, ALT, AST, ALP, bilirubin, albumin, creatinine as well as cholesterol – with HDL, LDL and triglycerides, GFR and Complete Blood Count. We also measured blood sugar hemoglobin A1C and five major inflammatory markers of IL-1, IL-6, C-Reactive protein, Homocysteine and TNF. In addition to performing a full safety run-up of the product, we also measured weight, BMI, girth, questionnaires for anxiety, appetite, pain, mood and finally – we bought brand new Fitbit Versa 3’s for all 125 study participants which gave us objective measurements for REM sleep, deep sleep, awake time, systolic/diastolic BP, SpO2 blood oxygen levels and daily caloric output values – which was really cool because it provided tangible objective evidence that participants weren’t going out and secretly exercising. So, we had 100 people taking the product and then 25 on placebo.
Green: Was this a safety trial?
Jaffee: Yes. The primary endpoint study was safety. That’s how we enrolled participants – as a general product safety study for a natural product. I decided to include a lot of additional efficacy measurements, including weight loss, measuring body mass index as well as heart rate for all the blood markers that we looked at. In addition to that we purchased brand new Fitbit Versa 3’s for the entire study group, which was great because they gave us objective measurements for three different sleep readings, deep sleep, REM sleep and rest asleep as well as lower output and blood oxygen levels.
We saw everything kind of working together. We saw deep sleep improve 300% within two weeks. We saw blood sugars come down significantly from those that are considered high, pre-diabetic ranges of hemoglobin A1C. You saw inflammatory markers reduce to normal levels, with 92% efficacy, which basically just means that those who were experiencing inflammation by means of these major inflammatory markers, after 90 days, 92% of subjects were reduced to nominal ranges. So, it was really fascinating to see how, with all the different measurements. that we can correlate different objective measurements. Then, we did subjective measurements too. We had standardized questionnaires for anxiety and pain, as well as an internally developed appetite and cravings questionnaire.
Green: Based on the results of that safety study, are there particular disease states you want to target going forward?
Jaffee: Moving forward, we are interested to look at each blood sugar and Hb A1C. I think one of the most exciting and popular successes of the study was the fact that we had 100 out of 100 participants lose weight without diet and exercise. Because we incorporated the Fitbit, we were able to obtain objective evidence that participants weren’t going and secretly working out. The Fitbit provided a caloric output value. It is basically an algorithm taking the number of steps taken, stairs climbed, heart rate, movement, etc. to populate a caloric expenditure value, which remained completely stable in our study population. Subjects were specifically instructed NOT to change any lifestyle behavior – specifically diet, exercise, and sleep, and that if any changes were to occur naturally that was acceptable. What this ultimately told us is that diets changed, and metabolisms increased, and we were able to support that notion with the appetite and cravings questionnaire that we had participants fill out where cravings did reduce and desire for sugary foods reduced 63%. These were questions that we internally developed for the appetite and cravings questionnaire, which were based on feedback that we received prior to the study.
Green: What are in your personal life or in cannabis are you most interested in learning about?
Jaffee: It’s changed a little bit over the years. My biggest passion I would say is performance. I think the hemp plant has so much to offer when it comes to superior nutrition and healing. Once I learned about the benefits and the potential of hemp with its food applications and specific protein composition – the powerful oxygenating properties of Hemp Seed Oil, the brain health properties it encompasses, and of course the cannabinoid potential… It got me very motivated to commit myself to this plant. It wasn’t long before learning all the incredible industrial applications and solution the plant also offers – such as plastics, textiles, biofuel, building materials – and as an environmental science major – learning about these amazing applications got me that much more excited, but knowing and trusting that CBD would be the first stepping stone in an industry that needs to evolve into all the amazing sustainable applications because it’s all it’s all very real. It will get there, but it won’t be easy.
Green: Thanks Arthur, that concludes the interview.
Conduction heating is a method used in most dab rigs and vape pens that relies on heating concentrate or flower on a metal surface to vaporize cannabis compounds for consumption. Care must be taken with conduction heating to avoid overheating the material, resulting in combustion or decomposition. Convection heating (think of heating food in an oven) can also be used to vaporize cannabis compounds and has the benefit of being able to control the heating temperature of the material more precisely.
Hanu Labs recently announced the launch of their Hanu Labs EVO Petra. The tabletop device leverages their convection heat-based Perpetual Heat Thermal Technology, which avoids combustion while efficiently extracting the desired compounds from cannabis flower or concentrates.
Prior to becoming the CEO of Hanu, Ricardo worked in sales at Jetty Extracts where he helped to build the Northern California territory. Ricardo is also a classically trained French chef who used to run a cannabis tourism company in California.
Aaron Green: How did you get involved in the cannabis industry?
Ricardo Willis, CEO of Hanu Labs
Ricardo Willis: I moved to California in 2016. I was a professional chef at the time and had just finished up my master’s degree after eight years of schooling. My business partner and I decided we wanted to get into the cannabis space. So, we started a cannabis tourism business. Cannabis tourism wasn’t in the Bay Area at the time. We were kind of first and we were about two years ahead of legalization. We ran a few tours and we started to get into the cannabis game. I found out I didn’t know as much as I thought I did about cannabis. So, I decided to go and work for Jetty Extracts and that eventually led to where I’m at today.
Green: What was your motivation for joining Jetty?
Willis: Education. I knew about flower, but I did not know as much about the manufacturing process. I was first exposed to concentrates in San Francisco and I was really fascinated by it. I wanted to learn more, because I knew that this was going to be the wave at the time. Coming from the east coast, I had never seen a vape pen. So, I come out to Cali, and I see all these different dabs and I’m like, “I need to know more about this.” Jetty was an opportunity for me to educate myself while also helping them build their Northern California division that had only been around for a few years, and they were trying to expand. It was a great opportunity working for those guys, I learned a lot.
Green: I got a chance to see the Petra in action last night. It’s a bit different from your standard dab rig. Can you talk about the standard dab conduction heating versus the Petra and convection heating?
The mica-encapsulated chamber and heating element
Willis: Think about your standard dab rig in the sense of taking a hot plate and dropping your dab onto that hot plate. It just sits there and begins to bubble and then evaporate from the heat. With the Petra, you take in all those same components, but you’re putting the concentrate into this mica-encapsulated chamber, where you have an all-glass air path that is one of the best surfaces for heating, and one of the safest. Those components with our perpetual heating system allow the dab rig, when we drop that nail in or we drop a basket for flower, that convection air circulates around the actual product. The oil begins to sublimate, or the vapor begins to make it through the flower, and it releases all those molecules that are found in the cannabis plant. And because of our glass air hydro tubes, when you pop those on, it basically filters it through water, and gives you one of the fastest and cleanest hits you’ve ever experienced.
Green: You mentioned flower as well as concentrates. Am I correct in hearing that you can also use flower with the Petra?
Willis: Yes. Dual functionality was one of the things found in our original model, the Vape Exhale that we first released nine years ago. I think that that’s very important for products. If a customer is going to spend anywhere between $300 to $500 retail, you need to give them more bang for their buck. Being able to vaporize flower and concentrates fits for the markets that we’re going into. People are consuming flower and concentrates at about the same percentage rate. So, we want to make sure that our devices can give the customer the ability to do both, either at home or on the go.
Green: So, you worked in the cannabis tourism industry. One of the trends we’ve got coming up in California is consumption lounges. How do you see the consumption lounges evolving over time? What are the challenges you see in California?
Willis: It’s a little different in Southern California versus Northern California. We’ve had consumption lounges in San Francisco, as well as Oakland for the past three years. We outfitted the entire lounge with VapeExhales at Barbary Coast, one of our early clients that we work with, which is downtown San Francisco. For us, we knew this is a space that would be thriving.
The Hanu Labs EVO Petra
I’m a big fan of the lounges, because I think people need a safe place where they can go to smoke. Those lounges offer that to people. It also gives them a chance to experiment with different technology and actually test it out before purchasing. Because of my hospitality and restaurant background, I’m always looking for the opportunity for people to become repeat customers. If you offer these things like consumption lounges, instead of people going to bars, they end up at your lounge after work. I think that is something that’s going to continue to grow.
I do think some of the challenges are going to be around single servings. A person doesn’t need to buy a full gram. Maybe they just need to buy a quarter of a dab or something like that. Companies will need to identify those potential pain points in that process, and then offer those smaller products that can be enjoyed while at the lounge.
Green: There’s a certain experience around the Petra. Where it’s really like a centerpiece of the table. How did you think about designing the user experience and designing around that conviviality?
Willis: That’s a great question. For the Petra, what we decided to design was slightly different from the VapeExhale. With the VapeExhale, the purpose of the device wasn’t super obvious, but the Petra has more of a centerpiece design. I’m a big fan of technology, so when I was designing the Petra, I was thinking about the KitchenAid mixer. That may seem strange, but the KitchenAid mixer is something that as a cook, either at home or in a restaurant, they own these things literally for 20 years. It has a very long product life. I wanted the Petra to be the same. I wanted it to look more like an appliance, I wanted it to be built with stability and durability so that when the customer purchases that product, it becomes a centerpiece that they can set up. If your grandkids come in, they see your vaporizer, it becomes more of an educational opportunity, and less about feeling embarrassed about your cannabis pieces. So, for me, design is all about ease of use, but also being appealing to the eye. The Petra is its own show, and it deserves to make a splash.
Green: What in your personal life or in cannabis are you most interested in learning about?
Willis: I am very interested in the customers. I started off in customer service when I was around 16 years old. The one thing that I learned is that the customer is the most important part of the sales cycle. I think that sometimes people focus on the B2B side and making our business partners happy, but my focus is, and always will be on the customers. I need to understand what customers want and how they want it. I’m intrigued by the science behind customer acquisition and want to learn more about how to make my customers happy. If they want cheaper pricing, I’m going to find a way to develop products to give them what they want at the price point they want. There is always going to be a customer who wants premium, or mid-tier or a customer who just wants something fully functional. Maybe they want something that provides the right experience for them, and they don’t have to break the bank to get it.
Green: Thanks Ricardo. That concludes the interview.
As a business owner, it is imperative to concentrate your time on only the most essential areas of your business. To focus more on revenue generation and growth strategy, outsourcing your accounting is one of the wisest decisions you can make for your cannabis business.
A great accountant will prepare financial statements, manage cash flow and ensure that you remain compliant with your state’s rules and regulations. Your best option is finding an accountant who possesses the required technical and business knowledge and has also navigated the cannabis industry and understands its nuances.
There are a lot of factors to consider when searching for the right accountant and it can be difficult to know what questions you should ask. We’ve put together this list with some important considerations that pertain to accountants in the cannabis industry.
1. Do you have a network of cannabis industry professionals?
One of the greatest perks of partnering with an accountant that’s already established in the cannabis space is that they typically have connections to other industry professionals that might be helpful in the future. For example, suppose you have questions about important legislation or what permits are required for certain operations. It’s beneficial to be connected with people that can answer these questions for you.
Similarly, an accountant well-versed in the industry can notify you of events, conferences and trade shows that may be beneficial to your business. A great indicator that an accountant is well established in the industry is that they’re members of well-known trade associations, for example, the National Cannabis Industry Association.
2. What formal certifications do you hold (enrolled agent, CPA)? Are you familiar with cannabis compliance?
A CPA (Certified Public Accountant) and an Enrolled Agent have passed the IRS’s testing and keep up with continuing education every year. Not only is it necessary that your accountant has all required licensing per Internal Revenue Services (IRS), but it is also crucial to make sure you’re operating in compliance with state laws for cannabis businesses.
Dispensaries and other cannabis businesses are subject to various tax laws across every state, making compliance challenging. The rules and regulations of each state are unique. There is no exact residency requirement for every state, and some states do not apply IRS code 280E.
While an accountant might hold the necessary certifications, they might not have the industry expertise to guide you through any compliance issues you might come across. It’s important that you choose someone who’s both properly certified and well versed in the cannabis space.
3. Are you currently representing cannabis companies? How long have you been in this industry?
There is nothing typical about the cannabis industry, and it operates differently from most other industries. Businesses that have operated in the cannabis space for several years and have a wide range of clients have more experience dealing with the challenges and obstacles that come with running a cannabis business.
Finding a cannabis accountant with experience is particularly important when it comes to compliance as the rules & regulations are constantly evolving. It’s often that compliance issues can lead to hefty fines from the IRS, so choosing someone familiar with the industry will save you from these penalties.
4. What are the advantages of outsourcing accounting rather than doing it myself?
While you can take a DIY approach and purchase software like QuickBooks, there is an inherent risk in tackling all of your accounting initiatives alone. As mentioned above, the industry has its own unique challenges that differ from businesses in other fields and failure to pay close attention to these things can result in serious financial and legal trouble. A great team of accountants has the knowledge to keep you informed on the ever-changing legislation and give you advice on how to avoid costly mistakes.
“A great team of accountants has the knowledge to keep you informed on the ever-changing legislation and give you advice on how to avoid costly mistakes.”
Similarly, outsourcing your accounting allows you more time to focus on the most critical aspects of your business. Running your own company is in many cases a 24/7 job, with entrepreneurs scrambling to find enough time to complete daily tasks and make efforts to grow their business. An accountant that keeps accurate records of your performance can give you the data needed to identify areas of improvement and increase overall productivity.
5. What are you expecting from me every month?
One of the main reasons why some clients are left dissatisfied by accounting firms is due to miscommunication surrounding each party’s expectations. A good accounting service will establish open communication around their own needs, goals, and objectives. Educating yourself on what an accountant expects from you will enable you to give them the information they need to provide accurate and efficient services.
On the other hand, it’s just as important that you understand what will be delivered by your accountant on a regular basis. Some firms operate on an annual basis and provide one-time bookkeeping or end-of-year tax preparation. Others take a more month-to-month approach, offering continuous business consulting and tailored services unique to your business. It’s helpful to have a checklist that both you and your accountant can reference that ensures you’re staying on the same page.
Why cannabis accountants are important
To meet the growing demand for cannabis, many dispensaries and other cannabis-related businesses are opening across the country.
A company in this sector has tremendous potential for success, but that success is not without risks, especially financial challenges. Throughout the cannabis industry, there is a need for financial professionals who can understand complex laws and regulations in order to make a legal profit from the industry.
Further, business owners require assistance in navigating complicated tax laws and managing primarily cash-based businesses without the support of traditional banks. It is advantageous to have an accounting team that is knowledgeable about all the traditional accounting functions, like financial reporting and bookkeeping.
Additionally, you should find someone who can help you make the right investments and manage the ongoing flow of money into and out of your cannabis business. A great accountant will guide you to the specific tax requirements applicable to your particular legal structure, how to pay taxes owed and if any tax deductions are available despite Internal Revenue Code (IRC) Section 280E.
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Section 280E is a relatively short code section, only 77 words to be exact, but it carries significant weight and can have a debilitating effect on the taxable income of marijuana [sic] related businesses (MRB). Section 280E of the IRC prohibits taxpayers who are engaged in the business of trafficking certain controlled substances, including cannabis, from deducting typical business expenses associated those activities. Section 280E, which was enacted in 1982 during the “War on Drugs” era, has become increasingly relevant for cannabis businesses. The cannabis industry has grown substantially in recent years with annual market values expected to reach $30 billion by 2025.
The IRC disallows any deductions or credits paid or incurred during a tax year if those deductions or credits relate to trafficking controlled substances. The courts have taken the position that the term “trafficking” in this case means “engaging in a commercial activity – that is, to buy and sell regularly.” Simply, the law denies cannabis businesses any U.S. federal income tax deduction for ordinary and necessary business expenses, despite being duly licensed as a legal business in their state of operation.
There have been court challenges and concessions made to Section 280E. Specifically, the 2007 court case Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner. This court case reinforced the precedence that Section 280E does not apply to cost of goods sold. The Internal Revenue Service (IRS) defines cost of goods sold to be “expenditures necessary to acquire, construct or extract a physical product which is to be sold.” Generally, for a retail MRB, this means that the direct cost of acquiring cannabis products for resale. Deductions for rent, utilities, wages, insurance and other operating costs common to ordinary businesses are generally disallowed. New York State has specifically indicated that it intends to follow Section 280E for its own income tax calculations, disallowing these same deductions against New York taxable income
