Tag Archives: legalize

September 2, 2022

Twelve Tips for Scaling Your Cannabis Business

By Eric Schlissel

We know a thing or two about scaling a cannabis business. While we don’t own a plant-touching business ourselves, we have helped companies like Tokyo Smoke, Superette and Northern Helm to open dozens of dispensaries in less than 3 years as their IT company. Here are some of the things we’ve learned along the way.

Find reliable partners

You can’t do it all alone. Especially when you’re trying to grow fast in a new industry like cannabis. Find reliable external partners you can depend on in areas like construction, design, staffing, financing, legal, real estate, accounting, HR, IT and security. If you’re just starting, consider dividing the work between competing firms, then committing to the one that performs the best.

Maintain consistency

You don’t want to reinvent the wheel with every new location. Develop standardized processes, procedures and equipment as early as possible. This is critical for aspects of your business like efficiency, profit margins and brand awareness.

We work with our clients to develop a standard IT stack (all the same hardware, software and configurations). This makes setups quicker and cross-location management easier and can make you eligible for bulk purchasing discounts.

At the same time, if any of them don’t work out, switch them out as soon as possible. Don’t compound the error by sticking with what isn’t working.

Develop standardized processes, procedures and equipment as early as possible.

Also don’t be afraid to try new things here and there or make each location unique in more subtle ways. Our clients at Superette are a great example of keeping their brand consistent enough across their locations that you know it’s a Superette store just by looking at it; at the same time each store is just a little bit different so that each location is a unique experience.

Leverage multi-site tech

Most cannabis software is web-based and lets you manage multiple different locations in a single platform. Make sure to make good use of this and not use different software for different locations.

This goes for a lot of non-cannabis-specific software too, like Sage, Office 365, Google Workspaces and Solink (a platform that lets you manage all your surveillance systems in one dashboard, and integrates with your POS or ERP).

Use compliance and licensing software

Cannabis regulations can vary widely not only state by state but city by city. Keeping up with all these regulations can be difficult even if you already have a legal expert to rely on.

Compliance software like Simplifya, ProCanna and BuildMySOP let you quickly figure out what the regulations are in a given area, which can make it easier to find a good location, get set up and stay compliant. These applications, along with licensing trackers like Cannabiz Media, can also help you find where cannabis license opportunities are available and send you alerts whenever a state or city is accepting new applications.

Buy materials ahead

This is especially important now with the supply chain crisis still going on, but in general it’s a good idea to start gathering all the materials you need as soon as you’re certain about expanding. In IT in particular, pretty much everything including cash drawers, receipt printers, tablets, POS terminals, firewall appliances and laptops has been in pretty short supply. We’ve heard that it’s the same for just about all materials that go into setting up a new cannabis location whether it’s a dispensary, cultivation, distribution or manufacturing facility.

Lab technicians use the Hunter device during a test process. InstantLabs manufactures the Hunter system as well as test kits for food pathogens and species identification such as the catfish testing commercialization agreement outlined with the FDA. — In IT in particular, pretty much everything has been in short supply.

We’ve stayed on top of it and avoided delays by buying months ahead, purchasing a surplus of product and maintaining close communication with our vendors and distributors; we suggest you do the same for any products you’re purchasing internally.

If you’re buying online and the store says “in-stock,” you may want to contact the store/vendor to double-check that it’s accurate. Sometimes you buy it and you find out that “in-stock” means its parts are “in-stock” in a factory in Asia somewhere and your product is still months away from being manufactured, shipped and delivered to you.

Promote from within

When you’re growing is a good time to promote the all-stars already on your team, giving them a chance to expand their skills and take on greater responsibilities. We’ve seen this with some of our clients where they promote their star budtenders to shift leads or managers at their new stores, and store managers to district managers in new territories. It works out for everyone – the employee gets a raise and a step up the ladder, and you ensure you maintain your company’s culture and fill important positions with people you already know and trust (not to mention it’s often more cost-efficient to hire from within like this than to bring in someone new).

Hire from without when necessary

Sometimes promoting from within isn’t an option, like when you need someone with a particular skillset or level of experience.

Maybe your current COO has done a great job opening and operating 5 stores, but what about 50? If you want a sure thing, you’ll want to hire someone that’s already shown they can handle 50 or more stores, and most likely you’ll have to look outside the cannabis industry to find it.

You’re seeing this more and more in the cannabis industry – some are promoting from within, but many are also hiring experts from other companies and from outside the industry, including lots of people with strong retail, food manufacturing, merchandising, packaged goods and highly regulated goods (especially alcohol) backgrounds.

This can be more expensive than promoting from within and can potentially have a negative influence on company culture and morale, but on the other hand you’re getting valuable expertise that can help you take your cannabis business to the next level; and plus, you may even be able to hire these people at a relative bargain since there are many out there that are eager to work in such an exciting, new and high-growth industry.

Be ready for things to break down

Even if you’re fully prepared, you should still expect some kind of hiccup or hurdle with any new location rollout. It’s just the way it is on projects with an ambitious timeline and a lot of moving parts. The usual culprits are routine construction delays, cable companies and other utilities screwing up, storms, and having to adjust your schedule according to government inspectors on short notice. On some of our jobs in Canada, for example, we’ve run into a few blizzards and cameras and wires getting knocked out/frozen over; and on one occasion we were moderately inconvenienced setting up a store just up the street from the 2022 Ottawa trucker protests.

Don’t panic, don’t get frustrated. Your careful planning will at least ensure that most things go right, giving you the flexibility to react to the things that don’t.

Consider avoiding unlimited license markets

There’s a reason many MSOs avoid unlimited license markets like Oklahoma and Oregon. Limited license markets provide protection against competition. Unlimited license states are often free-for-alls and a race-to-the-bottom on pricing. They’re much tougher markets.

Have a vision

Rather than just wanting to grow and make a lot money, it can be helpful to have a unique, compelling and somewhat clear vision for your company, like Superette’s “making buying cannabis as fun as using it.” This helps you motivate your team, maintain your focus and cohesiveness as you add lots of new people, and differentiate yourself in a crowded market.

Consider franchising where it’s legal and makes sense

Our client Tokyo Smoke has opened over 80 locations in just over 3 years of operations. If that seems like too much growth for one company, you’re sort of right – some of Tokyo Smoke’s stores aren’t company-owned, they’re actually separately owned and managed franchises.

Now franchising a cannabis business isn’t legal everywhere at the moment, but where it is legal it’s a time-tested method of growing your brand and company footprint fast, and establishing dominant mindshare and market share that can’t easily be challenged or reversed.

Consider M&A

Sometimes M&A is the only option for breaking into a new market, like if the market is already oversaturated or not accepting new applications. Established cannabis businesses can start at $1-$10 million per location depending on the situation. Don’t quote us on it, but with some markets becoming saturated and sales declining in areas like Oregon and Canada, you may be able to get a good deal from someone that wants out of the business before things gets worse – assuming you’re bullish on a market rebound or think you can perform better in the market than the current owner.

September 2, 2022

An Interview with Warren Bobrow, CEO & Co-Founder of Klaus, The Gnome

By Aaron Green

No Comments

California is the fastest-growing cannabis beverage market, according to a recent Headset report. The count of beverage product offerings in California has grown quickly, nearly doubling from 2020 to 2021. As of December 2021, there were approximately 530 distinct cannabis beverage offerings.

Mocktails have been a growing product category within the cannabis beverage segment. Klaus, headed up by Warren Bobrow, the “Cocktail Whisperer,” recently entered the California market with their ready-to-drink THC cocktail, Mezzrole, a unique terpene-forward beverage with three simple culinary-grade ingredients.

We caught up with Warren to learn more about his path to the cannabis industry and his inspiration for Mezzrole. Warren is a multi-published author of six books including “Cannabis Cocktails, Mocktails, and Tonics” and has contributed to publications such as Forbes and Skunk Magazine. After the loss of his fresh pasta business in Hurricane Hugo, he worked in banking for 20 years before reinventing himself and following his passions—becoming a bar back to bartender and master mixologist and penning his six cocktail-focused books. Warren crafted Klaus with knowledge gained from years of experience in the mixology and culinary worlds and with his strong enthusiasm for cannabis.

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

Warren Bobrow: It was a happenstance, and it was something that I never considered before. I was working in the traditional liquor industry, and because liquor is inherently a poisonous substance, I was slowly poisoning myself and my mind with the alcohol. I made a conscious decision back in July of 2018 – I was down to Tales of the Cocktail in New Orleans – and I said, “this is my last drink.” I was halfway through a Hemingway, which is absolutely my favorite cocktail to have and that’s what I was known for. That’s the drink that paved the way to a wonderful career on-premises and off-premises doing brand ambassadorship and being a named person within the liquor industry. As with all great careers, this one had to come to an end, or I was going to die because liquor was poisoning me. I was probably about 75 pounds heavier than I am right now. I just didn’t feel myself and I was going to be sick.

So, I decided to take my knowledge of cannabis, which was something that I’ve enjoyed since I was 12 years old – I am 61 now – and put it to use for me in this book, Cannabis Cocktails, Mocktails and Tonics. My first book, Apothecary Cocktails, really did pave the way. I wanted to include cannabis in my early books, but my publisher wouldn’t let me. It just wasn’t time until 2015 when I wrote Cannabis Cocktails, which is all based on the early apothecary. The inspiration for writing the book certainly was from being down in New Orleans and going to the Pharmacy Museum. They had an exhibition of cannabis in the early apothecary, and I knew immediately what I was going to do with the rest of my life. There you have it!

Green: It seems like it was a sharp cut off with the alcohol industry

Bobrow: Yes, like one day to the next, literally. It was absolute. I made the decision; I came back to New Jersey, and I never drank again. I drink a little beer and wine, but I haven’t had a distilled drink in years.

Green: How did the concept for Klaus come about? Was it something that you always had in the back of your mind?

Bobrow: The idea for creating a cannabis infused beverage came from being incarcerated in New York City for smoking cannabis in the street and being taken out of commission for 48 hours, I knew that if I was drinking a cannabis infused beverage like Klaus, which is the one that I created in California, no one would know my business. Of course, when this happened, it was in the early 2000s, so the technology and the pretense just weren’t available yet. But it did put something in my mind. If I was to create a cannabis-infused beverage using my knowledge and experience as a master mixologist, the fear of consuming cannabis would be diminished.

If you look at the book, Cannabis Cocktails, and you see the recipes, they’re not for the meek. They’re really meant for a medical community – someone who needs to really eliminate pain, if you will. Cocktails in the book started at about 250 milligrams of THC, whereas with Klaus they’re 10 milligrams, Two different stories completely!

My inspiration for creating Klaus certainly was from the gnome [Warren displays Klaus, The Gnome]. He’s a star and he’s been all over the world with me. I don’t know why I first started traveling with him. Maybe it’s because he was sitting up there up on my mantle and he told me that he wanted to go out on the road with me. I was traveling all over the world as a rum judge for the Ministry of Rum and for Rum XP. We just show up at food events. I’m a trained chef, I love going to the Fancy Food Show in New York City, and I’d meet people and they invite me out to see their places. Then I started writing for Forbes and I don’t know, my career has been up and down. I’ve tried to follow my dreams ever since I left the corporate world in May of 2009.

Green: Let’s talk about the product.

Bobrow: I just have one SKU right now, which is the Mezzrole named for Mezz Mezzrow, Louis Armstrong’s weed dealer. You can’t make this stuff up. It’s all real.

Green: First, how did you land on the flavor profile?

Bobrow: For someone who’s a rum head like myself, we used to drink rum for breakfast. That’s how you become a rum head. The Mezzrole is based on a Ti’ Punch, which is the national drink of Martinique. Ti’ Punch is usually made in Martinique with rum Agricole, which is a sugar cane-based rum rather than a molasses-based rum. It’s the freshly pressed sugar cane rum before it ferments so it has a lovely floral quality and it’s 100 proof. There’s nothing weak about it!

A Ti’ Punch is freshly squeezed lime quarters, the 100 proof Agricole – one or two ounces – and cane sugar syrup stirred usually with your finger like my old friend Gaz Regan, who’s no longer with us, used to do it. He was known for his finger stirred negronis. I would do it preferably in a clean glass and there’s no ice involved because if you’re on a sailboat, you probably don’t have ice anyway. So, it’s potent. It’s a very potent drink. That’s the basis of the Mezzrole.

The Mezzrole contains a single strain of cannabis. We used a craft, land-raised strain called Hippie Crasher. It’s an indica leaning hybrid that is terpene forward. The Mezzrole utilizes the terpene aromatics of the cannabis strain. So, we have this gorgeous French lime puree that I get made from limes that are sourced down in Martinique. They have a certain oily quality to them and they’re very pungent. They’re very citrus forward and very flavorful.

Then, I’m using a ginger syrup that’s made in what I would say is a Great Britain or Jamaican style called Picketts. It’s from Denver, Colorado. My old friend Matt Pickett, and his late brother Jim created it. Jim was the bartender for Malcolm Forbes on his yacht, the Highlander, when they had it in the waters between me and Palm Beach, or wherever they happened to be on the island. Jim crafted this incredible ginger syrup, which is really authentic. And in later years, it became the Pickett’s ginger syrup that I would use in this beverage because I’m paying homage to Matt’s brother by using his extra hot and spicy ginger syrup in here along with the French lime purée.

The final element – there are only three flavor elements [besides the cannabis] – is rice vinegar. Rice vinegar in this case is something called mirin. There are two different types of mirin. There’s the sweet mirin and then there’s the dry mirin, and Mezzrole utilizes the dry mirin. I didn’t want to add any sugar. Mezzrole is six tenths of a gram of sugar for the entire can, which is eight ounces, 16 calories.

So, to recap, each can of Mezzrole is eight fluid ounces, six tenths of a gram of sugar, ginger, lime and rice vinegar with THC infusion. And it’s not a seltzer!

Green: What was special to you about the Ti’ Punch?

Bobrow: My family had a yacht, and we would go places in the Caribbean. One of the places we would go in the Caribbean was Down Island and they would have drinks like the Ti’ Punch. I remember that it was emblazoned in my brain. It was a drink that got me drunk. It was what sailors did; they got drunk. And you would get drunk on drinks that go back to the days of the pirates, because they probably didn’t have ice on the sailing vessels. So, why should a couple million-dollar yacht make any difference? We had icemakers, but you drink the drink without ice. You drink it like it was drunk in the age of sailing.

I wanted to reinterpret the Ti’ Punch and bring credence and life to that drink by bringing it to life in the Mezzrole. But the Mezzrole has another story behind it entirely. That’s because Mezz Mezzrow, who was a jazz head during the jazz era, brought between two and 4,000 pounds of cannabis up from Mexico, and sold it in Detroit, Chicago and Harlem during the early days of jazz. He made quite a name for himself. At the time, cannabis was not illegal on a national level yet. If you were to ask for a joint or reefer, you might become detained by the police, especially if you were Black. Not only were the police at that time incredibly anti-jazz and anti-Black and anti-cannabis, but they were just anti people having fun! So there had to be code names and a well-rolled cannabis cigarette was known as a “Mezzrole” and that’s what I named the cocktail after.

I’m paying homage to Louis, and I’m friendly with Louis’ daughter, Sharon. She’s the daughter that no one ever knew about. It’s a very interesting story. We’re hopefully going to do something together. I find great inspiration in jazz, and we wanted to pay homage to the role of characters in jazz by creating a beverage that hopefully wouldn’t get us arrested.

Green: Can you walk me through your choice of strain for the beverage?

Bobrow: I work with a company named Vertosa. They are the magicians in the world of nanotechnology emulsions. They’re scientists like yourself, who are upper intellects who dream in color. And the colors that they’ve chosen are the colors of the plant. So, they’ve enlivened the plant chemically through their process. I’m not privy to that process, but I’ll tell you it works. Their emulsion is gorgeous stuff. I just chose the emulsion for my next two SKUs and it’s exactly what I was looking for. It’s slightly bitter, it has depth and character, and we haven’t even added the terpenes in yet. So, it’s well balanced, and it will work exceptionally well with the craft ingredients that I’m working with. I don’t use industrialized ingredients, these are all bartending ingredients, if you will. We do 5,000 can production runs with bartending ingredients. It’s incredible food science. I love it.

Green: What was behind your decision in adding the terpene flavors?

Bobrow: What makes that interesting is no one else is doing it. So, we’re the first again! Not only did I write the first book on cannabis, and cocktails, and tonics, and all that stuff, but I created the first beverage that actually smells like cannabis. So, when you’re drinking one of my beverages, and you drink down maybe a quarter inch, and you put your nose right over the top and smell it, it smells just like the plant along with that ginger and the lime and that tangy quality of the mirin. And it’s spicy. It has an herbaceous quality to it. It’s really uncanny.

Green: Were there any challenges in working with terpenes in a beverage?

Bobrow: Yes, there’s always challenges. First off, I’m here in New Jersey, and the company that I’m working with is in California, so they can’t send me anything. So, I work very closely with a food scientist named Chris Anderson who did my scalability, and he’s absolutely brilliant. His palate mimics my own. I don’t want a sweet beverage. I want a tangy beverage. I want something that has balanced quality and fun and it makes you want to dance. I’m not looking for something to put me to sleep. That’s not my goal in life. Life is very short, and you want to have a beverage that is talkative and doesn’t get you totally destroyed. There are beverages out on the market that have 500 milligrams of THC called syrups. They’re absolutely delicious, but they’re so destructive because they want you to put them in a sugary beverage and drink the whole thing down.

I’m not a kid anymore and I don’t drink like a kid. I drink with sophisticated flavors and make beverages that are memorable. People come to me – and have since the early part of 2009 – and they say things like, “That’s the best cocktail I’ve ever had in my life. How do you do that?” My aim in life is to ruin people for their bartender because I expose all the things that our bartenders are doing to rip them off.

I started as a bar back and I worked my way up. I went to this guy named Chris James, who was working at The Ryland Inn running their beverage program. I needed a job, and he hired me as this bar back for a year and they kicked my butt. After that I could write about this stuff with knowledge and not just with something I read in a book. There’s a lot to be said for education and going to bartending school. There’s also a lot to be said for cutting your own ice and squeezing your own juice and taking out the trash.

Green: What are some of the challenges you are facing at Klaus?

Bobrow: We’re hoping to do a Series A round of financing. I wonder who would be interested in lending to us or giving us money or investing in us. I always wonder why anyone would be interested in any of this! But I have a talent and a passion, and I know that it will take me to the next step in life. I’ve waited and been very patient. I have massive shoes to fill, and I’m so committed to being ambitious.

I was an executive assistant in a Trust Bank for 20 years. I put my life on hold for others because they wanted to make an example out of me. I never became the person that my parents wanted me to become. They wanted me to become a lawyer and I didn’t have the aptitude for that. I had the aptitude for being a creative soul and a creative mind. It just took me 20 years longer to be able to achieve that.

I consider myself the luckiest man in the world because I did work for the C-suite and for the top of the house and I sold wine to them when I worked on the nights and weekends in a wine store. My customers were the presidents and “kingmakers of the world.” Here in Northern New Jersey, if nothing else, it’s pretty affluent. So, I’ve long been accustomed to coming from that environment. I know what that environment means and the importance of that environment. I had to figure out how to make it myself because I was, in polite parley, “disowned.” So, I am self-made, and I have a great product that I’ve created out of nowhere. It’s hopefully going to allow me to figure out what the next step will be in my life. I want to make this a national name.

Green: What trends are you following in the cannabis beverage space?

Bobrow: I’ve had some good ones. I’ve had some okay ones. And I’ve had some that are just, I don’t know. I’m a cook. I’m a saucier. I love flavors. I’m trained in France. I cook. It’s a lifelong thing. I started as a dishwasher, and I worked my way up. I’ve traveled the world eating.

I’ll tell you, if you don’t know flavors, you can’t put anything together. And if you don’t know what goes into making a beverage that’s different than what anyone else is doing in the world, then you don’t deserve to be in this business because it’s highly competitive and people play for keeps. If I only get one chance to capture people’s imagination, it comes with this beverage right here [Warren holds up a can of Mezzrole].

Green: What’s next for Klaus?

Bobrow: I hope to be doing Klaus Nein. It’s a terpene forward, non-cannabis infused craft beverage. It doesn’t have any THC, so I can sell it everywhere. I caught the travel bug years ago, when I was traveling all over the world for the rum business. And I got it back again. I hate that the world became such a small place during COVID. Because it really is a big place. And it’s a place that I need to explore more of. Stay tuned!

Green: What are you most interested in learning about?

Bobrow: You know, it’s funny. I think everyone that I come across I can learn something from. My teachers at Emerson and later at MIT, where I spent a fitful year, taught me that I wasn’t the smartest person in the room, but I certainly was the most inquisitive. So, I want to be known as someone who has pretty good listening skills. I also have great skills in the way of trying to draw out answers from people. So, I have a lot to learn and I’m excited about the opportunity of learning. If I can share a little bit of my knowledge with other people within the industry and they respect me for what I’ve achieved, then I’ll be a much happier person. I’m already happy. I’m very lucky. I am the luckiest guy in the room.

Green: Thank you Warren. That concludes the interview!

September 1, 2022

As More Opportunity Arises in the Cannabis Industry, Potential Business Pitfalls Also Increase

By Jonathan Storper

No Comments

Benjamin Franklin famously advised fire-threatened Philadelphians in 1736 that “an ounce of prevention is worth a pound of cure.”

With industry growth and maturation comes increased opportunities and challenges. As the cannabis business matures and spreads into new geographic regions, the industry can take advantage of larger markets; however, it also faces increased risk and litigation across a myriad of its operations. This article identifies some of those growing pains along with suggesting how to avoid the more obvious and typical types of issues before they become a problem.

Contracts/Commercial Agreements

One source of emerging trends in cannabis litigation notes that about 1/3 of litigation in 2022 could be classified broadly as commercial disputes. As the various state laws allow for expansion of legal cannabis operations into more states, operators will enter into more commercial agreements to grow and scale operations across the United States.

I am surprised by how many companies do not adequately document their commercial agreements. A host of issues too numerous to discuss in depth here should be addressed in a commercial agreement depending on the type of transaction. In short, make sure agreements are in writing, signed and include an effective date. They should be complete and unambiguous, allocating responsibilities and risk as intended.

Fundraising

When fundraising, whether as debt or equity, a company must comply with complicated and technical U.S. and applicable state securities laws. These laws and regulations require either the registration of the securities offering, which is very expensive, or an applicable exemption from a registration. Failure to comply could lead to lawsuits filed by investors trying to recoup all their money, even if they have no damages, along with possible fraud claims or fines and penalties imposed by applicable federal or state agencies.

Landlord-Tenant disputes

When renting commercial real property, create agreements that address the major issues in writing in case of disputes with property owners. Understanding the lease terms and requirements, as well as tenant rights and duties under state and local law, are essential. Pay attention to lawful uses, minimum term and renewal options, operating expenses and tax requirements, tenant default issues, base rent and other rental charges, common area maintenance charges, maintenance and repair, tenant improvement requirements and allowances, sublet and assignment, and requirements for the refund of the security deposit.

Employment

A common area of misunderstanding that leads to disputes is the law governing employee relations. Companies often misclassify employees, creating valid claims for past due benefits, fines and other damages for failure to classify correctly. In California, for example, correctly classifying a worker as an independent contractor is difficult. Some common mistakes to avoid include:

Designating non-exempt workers as exempt and misclassifying employees as independent contractors.
Failure to pay required minimum wages or overtime.
Not providing required meal and rest breaks.
Failure to keep accurate time records for non-exempt workers.
Inaccurate and noncompliant payroll records (aka “wage statements”) with all the required information.
Improperly administering leaves of absence, especially for employees with medical conditions or disabilities.
Not carefully documenting performance issues by using performance reviews, or “writing up” poor performance, etc.

Failure to have a written employee handbook covering important policies such as vacation and required conduct, as well as misapplying those policies, can lead to disputes. Pay attention to state and local employment laws that apply at the different stages of development and growth.

Intellectual Property

Protecting the company’s intellectual property is important to maintain the goodwill and value of a business. Carefully evaluate the requirements for any patent, trademark, copyright, and/or trade secret protection and come up with a plan to implement and monitor the applicable intellectual property assets. Do not disclose possible patentable intellectual property and inventions before filing a provisional patent application, or the ability to obtain patent protection will be destroyed. Before using a tradename or trademark in commerce, investigate if anyone else is using a similar name for similar goods and services. Failure to do so could lead to claims for infringement and a judgement requiring the company to stop using its preferred name or logo after investing time and money in creating the brand. Consider registering at the state and federal level the name and logo to secure your rights in the brand. What and where a cannabis company can register its brand name and logo for protection are currently limited, so be advised registration can be tricky.

Trade secret protection attaches to valuable information not readily ascertainable by lawful means, such as a formula, pattern, method, device, compilation, program, technique, or process that is secret. Protection afforded to trade secrets does not expire if the information is kept secret. For instance, the Coca-Cola formula has been kept secret for over 100 years, thus maintaining its value. Companies must also implement and maintain appropriate measures to protect the inadvertent disclosure of the information in order to maintain an asset’s status as a trade secret. Before disclosing any confidential information, make sure to have a proper written confidentiality agreement in place with the recipient, or you may lose the protection afforded by trade secret law.

Hiring the right workers to develop valuable intellectual property is important to the success of any business. Make sure to have employees and contractors assign their interests and ownership rights to the work they create, and develop a written invention-assignment agreement in favor of the company to avoid ownership disputes. Interests in copyrightable works created by service providers must be assigned in a written agreement. Failure to do so could diminish the company’s value.

Taxes & Licensing

Sometimes a business unavoidably gets behind in paying its taxes. Failure to pay taxes on time leads to penalties and fines and possible expensive audits by the tax authorities. In addition, personal liability can attach to directors and officers for failure to pay employment taxes. Cannabis companies may have several licensing requirements as well that are important to track to stay in good standing.

Insurance

Adequate insurance is a must-have for every business. Conduct a periodic checkup of the company’s insurance coverage. Consider directors’ and officers’ insurance, general commercial liability and property, products liability, workers’ compensation, employment practices liability coverage, cybersecurity, and business interruption insurance. Those types of coverage are important protections for the risks related to any business that sells a product or service, has employees, deals with the public, or could lose income from unanticipated events like fire, natural disasters and civil interruptions. Discuss your particular insurance needs with a qualified insurance broker, as one size does not fit all.

Consult with Qualified Legal Counsel

Consult with legal counsel to analyze and prepare for the risks noted in this article and other common legal issues to protect the company’s assets, avoid disputes and build and maintain company value. Otherwise, you may find that, as old Ben Franklin noted, you’ll spend many pounds to try to cure problems that could have been avoided with just an “ounce of prevention.”

August 31, 2022

Soapbox

Fly By Night: Do Your Gummies Take the Red-Eye?

By Douglas Rohrer

No Comments

The global vitamin supplement market is projected to grow at 6.2% compound annual growth rate (CAGR) to $71.37 billion by 2028 with the most rapid growth now occurring in the gummy vitamin segment. Gummy supplements are expected to have the fastest CAGR at 12.6% to exceed $33 billion by 2028. Initially developed for youths, gummies are now preferred by all age segments as an alternative to tablets, capsules and pills.

As one might expect, cannabidiol (CBD) gummies are also projected to grow rapidly at a 30.7% CAGR to $13.9 billion by 2028. In terms of actual number of CBD gummies produced last year, a rough estimate would be at least 1.7 billion. For perspective that equates to 53 gummies produced every second, 24 hours a day, 365 days per year. One might reasonably ask, “So where do all these gummies come from?” and “Who makes them and under what conditions and quality assurance standards?”

There is no short answer to these questions nor confidence that all cannabinoid gummies are manufactured with adherence to a minimum set of safety and quality standards. Gummy recipes and ingredients are readily available online and there is no shortage of hobbyists who make small batches for family, friends and to sell at retail pop-ups and farmers’ markets. There are a number of well-known brands that started out in home kitchens and garages. In terms of production scale, on the other end of the spectrum are companies like Bloomios, Inc. (OTCQB: BLMS), that operates a 51,000-square-foot Current Good Manufacturing Practices (cGMP) compliant facility in Florida.

The Hobbyists

A variety of CBD products on the market today

For the hobbyist producer, they often begin to scale out of their home kitchen and take over part of their garage or basement and while the entrepreneurial spirit is admirable, most consumers wouldn’t be comfortable with their pharmaceuticals, supplements or even grocery items being manufactured under these conditions which often lack:

Rigorous sanitary practices
Measures to mitigate contaminants entering the production areas
Quarantine, chain-of-custody audit and testing of active ingredients used in production
Standardized and rigorous quality assurance testing of finished product
Certificate of Analysis (COA) for active ingredients in finished product for certainty of dosage levels
Labeling and packaging standards to ensure product information and volumes are correct
Batch record data collection, retention and audit procedures.

However, the hobbyists constitute only a very small fraction of gummy production today, and they typically take great pride in their work and show a high degree of care in production practices. Thus, when demand begins to outpace the artisanal home production capacity, many growing brands turn to contract manufacturers to assist with scaling the production side while the brand focuses on the sales, marketing and distribution side of the business. This is an ideal solution as high quality product can be produced at volume in cGMP facilities which enhances the consumer experience, confidence in the product and further grows brand value. This is a best-case scenario of small emerging brands that care deeply about their reputations and their customers’ experience scaling production and growing responsibly.

The Opportunists

The real underbelly of commercial gummy production is characterized by the pure profit seeking producers that set up semi-permanent production lines in flex-industrial spaces not suitable for food handling, with limited buildout for isolation of each production stage. This process includes: materials storage, weight/measures prep, ingredient mixing, molding, dehydration, coating, sorting and filling, labeling and finish packaging. Lacking cGMP compliant facilities and practices, they neglect or fail entirely to maintain batch records, COAs or chain-of-custody practices and have limited ability to address defective product once in the stream of commerce. Let’s refer to these manufacturers as the “Opportunists.”

Opportunists see the current cannabinoid gummy market for what it is. It is an emerging market really taking form only since the 2018 Farm Bill legalized hemp derived cannabinoids. As such it is very much in its “gold rush” phase with many of the participants having just entered the sector. Many participants have adopted ad hoc practices with no standardization and no explicit federal oversight because the FDA has yet to acknowledge any cannabinoids under its generally regarded as safe (GRAS) standard.

In addition, the FDA has excluded CBD products from the dietary supplement definition of the Food, Drug and Cosmetics (FD&C) Act. Under the FD&C Act, if a substance is an active ingredient in a drug product that has been approved or has been authorized for investigation as a new drug, then products containing said substance are excluded from the definition of dietary supplement. So far cannabinoid gummy demand has continually outstripped supply supporting attractive margins and with little oversight. The Opportunist mindset has focused on maximizing profits while they can before regulation increases costs, compresses margins and reduces profits.

The Opportunists have more cover to seek profit maximization as opposed to incurring the cost of setting up cGMP facilities and adhering to rigorous standards due to the fact that the brands consumers recognize are often manufactured by one or more third-party contract manufacturers. Some brands also want to maximize near-term profits and manufacturers with a lower cost structure can more effectively compete on price as opposed to quality.

As demand surges, some brands will supplement their third-party cGMP produced product with additional product sourced from Opportunists and “recycle” the valid COAs from their cGMP product without the cGMP manufacturer or consumers even knowing. With lax regulatory oversight, these brands are inclined to look the other way on their contract manufacturer’s production practices so long as the large volume orders are delivered on time and at lower cost.

For gummies produced by Opportunists, if there are product defect issues, the consumers likely won’t be able to rely on the batch record data and purported COAs linked to/from QR codes on the container, many of these COAs have been recycled from legitimate batches or simply doctored up and reproduced rather than generated on a per batch basis. There is limited to no audit trail and recalls are unlikely to be effective, if even initiated. A refund is the most likely solution a consumer has which leaves perhaps a much larger run of defective product in the market still unaddressed. Moreover, brands that suffer reputational harm due to quality issues can simply launch a substitute brand with a similar look through its same distribution channels and maintain much of its market share.

Best Practices

If today’s CBD gold rush sounds much like the Wild West, you would be correct. However, as more consumers become aware of cannabinoids’ health and wellness benefits in addition to the recreational uses, this larger and more diverse consumer base is raising the bar and demanding more transparency and certainty on manufacturing practices than ever before.

americana dummies — A roughly estimated 1.7 billion CBD gummies were produced last year

How are the leading cannabinoid nutraceutical manufacturers proactively addressing consumers’ desire for high quality, rigorously tested products manufactured in accordance with standards already imposed on mainstream nutritional supplement and prepared food manufacturers? Although the answer may be simple, the implementation and ongoing compliance is not.

The answer is voluntary adoption and compliance with the same regulations applicable to non-cannabinoid dietary supplement manufacturers. Given that the FDA has not recognized cannabinoids as dietary supplements quite yet, certain aspects of dietary supplement regulation can’t be adhered to such as notifying the FDA of structure/function claims as new products are brought to market or notice of new dietary ingredients. On the other hand, many of the regulations can and should be adhered to by cannabinoid nutraceutical manufacturers to ensure its safe, transparent orderly growth.

Chief among the FDA requirements that Bloomios and other leading manufacturers adhere to are:

Register with the FDA as a food handling and production facility.
Adopt Current Good Manufacturing Practices for dietary supplements which establishes uniform standards needed to ensure quality throughout the manufacturing process and verification of the identity, purity, strength and composition of their products.
Undertake at least annually an independent third-party cGMP audit of their facility and procedures.
Comply with Code of Federal Regulations (21 CFR 101.36) supplement label requirements to ensure that the ingredients list is accurate, and the content matches the amount declared on the label among other disclosures.

The most significant challenge in adopting all of the above best practices is cGMP facility qualification and ongoing compliance. The cGMP standards require specific facility build-out features, equipment, and of course standard operating procedures. There are significant additional costs to bring a cGMP facility on-line, additional time and required experienced personnel that can implement the operating procedures and recertification every time a production line’s configuration is changed or augmented with additional equipment.

Bloomios annual cGMP audit was conducted in August and over 130 specific requirements were evaluated and graded. While Bloomios passed the audit and evaluation, what is of far greater significance is that cGMP practices become part of a company’s culture so that these high standards are maintained year-round and not rushed into practice just for the audit.

August 29, 2022

Cannabis Industry Sales Tax Utility Exemptions

By Dennis Anding, CPA, Renee Sorrels, CPA

No Comments

A utility study can help cannabis growers, cultivators and processors identify opportunities for sales and use tax savings by exposing potential refunds. Thirty-five states currently allow a sales tax exemption for utilities used in manufacturing or processing activities. Thirty-four states have published guidance that provides for a formal utility study process while one state, Mississippi, does not have formal guidance. For Mississippi, the process is to work with the state contacts to secure the exemption.

Generally, the exemption includes the purchase of electricity, natural gas and water and typically applies to the percentage of electricity, natural gas and water used or consumed within the manufacturing process as defined by state statutes and regulations. However, in some states purchased electricity, natural gas and water might be 100% exempt if certain usage percentages are met or exceeded. Facilities that grow, cultivate and process cannabis generally use significant kilowatt hours of electricity in the manufacturing process, and this exemption can result in sizeable tax savings. Without the proper analysis, unwary taxpayers might unknowingly leave significant utility savings on the table.

How to qualify

To qualify for the exemption, states require eligible taxpayers to perform a utility study to analyze the usage of utilities within the manufacturing process versus the taxable use of utilities (such as in general and administrative and office areas). Some states have a predominant use provision under which if 51% or more of an electric or gas meter is used in manufacturing then 100% of the meter’s tax is exempt, while many other states will exempt only the exact percentage of qualified usage as calculated by the utility study.

Some states require the study to be conducted by a third-party provider. Texas requires that the utility study be performed by a certified professional engineer. Taxpayers that engage a third party to conduct a utility study would be wise to consider completing a cost segregation analysis on their facility at the same time, as the two analyses together could bring extra value and savings.

Study process

An energy analysis and comparison should help establish the qualified utility usage percentage used in claiming the sales tax exemption. Once the usage percentage has been calculated in the respective state, it makes sense to review invoices from utility vendors to quantify any sales and use tax overpayment amount.

Refunds for sales and use taxes previously paid can then be requested directly from the state taxing authorities or any vendors retroactively back to the state’s open statute of limitations (typically three to four years). Taxpayers should also establish the exemption prospectively to obtain the benefit of not paying sales and use tax on the amount of manufacturing usage on future invoices. An updated exemption analysis might be needed every three to four years, depending upon the applicable state rules, or when the processing area undergoes a significant update, such as adding new machinery and equipment to the facility or removing machinery and equipment from the facility.

Other sales and use tax refund opportunities

In addition to the exemption on qualified utilities, many states extend the manufacturing exemption to qualified machinery, equipment, and consumables. Generally, to qualify the equipment must cause a physical or chemical change upon the product and be predominantly or directly and exclusively used in the manufacturing process. The exemption may apply to supplies and consumables that are used or consumed in the process as well. Agricultural exemptions are also available for cannabis growers, cultivators, and processors to potentially qualify for.

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

August 22, 2022

Intimate Care Products with Cannabinoids Need More Safety Data

By Cindy Orser, PhD

No Comments

Cannabinoid products for intimate care use are now being sold in the unregulated cannabidiol (CBD) marketplace without proper evaluation of their impact on the vaginal microbiota or women’s health. Cannabinoids can exhibit complex and at times contra intuitive actions. The addition of CBD to these products is presumably for its anti-inflammatory pain-relieving qualities even though little is understood with regards to dosing and formulating. Moreover, in states where cannabis is legal, tetrahydrocannabinol (THC) along with other minor cannabinoids are also being added to intimate care products without purview of any federal agency. In general, the impact of vaginal products on vaginal microbiota is poorly understood. Ten years ago, Jespers et al. (2012) proposed to monitor lactobacilli indicator species of the vaginal microbiota in safety trials of intimate care products. Yet today, human safety data are not required prior to commercialization of intimate care products which are currently regulated like cosmetics except for lubricants which do require a 510K filing with the FDA.

The vaginal microbiota (VMB) of healthy women is dominated by Lactobacillus species, which exert important health-promoting effects to their host through the production of antimicrobial compounds, including hydrogen peroxide and lactic acid, to prevent invasive microbes from establishing in the vaginal epithelial mucosa (Pino et al. 2019). It was established almost 40 years ago by Speigel et al. (1983), that changes to the dominant Lactobacillus species, a process called dysbiosis, and overgrowth by diverse anaerobes can result in symptomatic conditions including bacterial vaginosis (BV), vaginal candidiasis, pelvic inflammation, and endometriosis (Taylor et al. 2013). The conditions resulting from dysbiosis are also linked to fertility problems, poor pregnancy outcomes, spontaneous miscarriages and preterm birth (Laniewski et al 2020).

An example of an infused intimate care product, the Foria Awaken Arousal Oil with CBD

Complications from dysbiosis of the reproductive tract can be serious in women wanting to become pregnant and in already pregnant women, including preterm premature rupture of membranes, spontaneous preterm labor and preterm birth (Ventolini et al. 2022). Reproductive tract microbiomes from idiopathic infertile women differ from fertile women’s VMB (Tomaiulol et al. 2020; Wee et al. 2018). Numerous studies have documented the vaginal community type microbiota associated with occurrence of BV around the world showing that HIV load is inversely proportional to lactobacilli species but positively correlated with BV (Sha et al 2005) as well as endometrial and ovarian cancer development (Walther- Antonio et al. 2016; Zhou et al. 2019).

Sexual lubricants often contain antimicrobial preservatives that have been shown to directly impact lactobacilli species in the cervicovaginal microbiome. The deterioration or absence of the lactobacilli-dominated vaginal mucosal biome through exposure to over-the-counter lubricants has been linked to increased incidence of BV (Brotman et al. 2010) and release of IL-8, a proinflammatory innate immunity mediator, produced by human epithelial cells to recruit leukocytes in response to infection, initiating an inflammatory response (Fashemietal.2013). The addition of under-researched cannabinoids to these products introduces the potential for further biological activity. Cannabinoids are widely reported to exhibit anti-microbial activity in vitro. The mechanism of CBD’s anti-microbial activity is thought to be due to its ability to intercalate into cytoplasmic membranes (Guard et al. 2022) and thereby modulate membrane vesicle (MV) release from bacterial cells which is associated with cell-to-cell communications (Kosgodage et al. 2019). Treatment of the gram-negative bacteria, E. coli, with CBD inhibited MV release and resulted in higher susceptibility to antibiotics but had minimal impact on gram- positive bacterial MV release. And CBD has recently been documented to inhibit the common human fungal pathogen, Candida albicans, from forming biofilms due to increased membrane permeability, reduced ATP levels, and modified cell walls (Feldman et al 2021).

In other reporting, the in vitro antimicrobial properties of CBD were demonstrated to have selective activity across a wide range of gram-positive bacteria, including several antibiotic resistant and anaerobic strains, with minimum inhibitory concentrations (MIC) in the low ppm range (Blaskovich et al. 2021). The conditions of a study impacted the observation of inhibition; for example, if human sera were present in the assay media, the antibacterial activity was drastically reduced. This has been attributed to CBD’s propensity to bind to non-specifically to proteins and thereby become unavailable (Tayo et al. 2018). Surprisingly, CBD does not exhibit broad antibacterial activity against Gram-negative species except against the human pathogens: Neisseria gonorrhoeae, N. meningitides, Moraxella catarrhalis, and Legionella pneumophila (Blaskovich et al. 2021). Bacteria do not develop resistance to CBD, but CBD is also non-systemic because of its high serum binding activity (Tayo et al. 2018).

The active ingredients in intimate care products can impact beneficial microorganisms but also deleterious ones. CBD has become a widespread, understudied active ingredient for women’s health. Today the molecular screening tools exist to conduct large scale epidemiological studies to further understanding of the consequences of dysbiosis and document the adverse effects on women’s reproductive health outcomes. Preventative treatments to reestablish dominant lactobacilli, in particular L. crispatus could have big impacts on not only women’s health but public health (Borgdorff et al. 2014).

As Ley R (2022) recently opined on the human microbiome, “there is much left to do.” Microbiomes are essential to the proper functioning of our bodies affecting social engagement, mental health, obesity, and disease states, and little is known about differences in microbiota across different groups of humans. More research is needed on the biological activity of cannabinoids as well as regulatory oversight to protect the health and safety of consumers.

References

Blaskovich MAT, Kavanagh AM, Elliott AG, Zhang B, Ramu S, Amado M, Lowe GJ, Hinton AO, Thu Pham DM, Zuegg J, Beare N, Quach D, Sharp MD, Pogliano J, Rogers AP, Lyras D, Tan L, West NP, Crawford DW, Peterson ML, Callahan M, Thurn M (2021) The antimicrobial potential of cannabidiol. Commun Biol 4:7
Borgdorff J, Tsivtsivadze E, Verhelst R, Marzorati M, Jurrrians S, Ndayisaba GF, Schuren FH, van de Wijgert J HHM (2014) Lactobacillus-dominateed cervicovaginal microbiota associated with reduced HIV/STI prevalence and genital HIV viral load in African women. The ISME J 8:1781-1793.
Brotman RM, Ravel J, Cone RA, Zenilman JM. (2010) Rapid fluctuation of the vaginal microbiota measured by Gram stain analysis. Sex Transm Infect 86(4):297-302.
Fashemi B, Delaney MA, Onderdonk AB, Fichorova RN (2013) Effects of feminine hygiene products on the vaginal mucosal biome. Microbial Eco in Health & Disease 24:19703-08.
Feldman M, Sionov RV, Mechoulam R, Steinberg D (2021) Anti-biofilm activity of cannabidiol against Candida albicans. Microorganisms 9:441-457.
Ilha EC, Scariot MC, Treml D, Pereira TP, Sant’Anna ES, Prudencio ES, Arisi ACM (2015) Comparison of real-time PCR assay and plate count for Lactobacillus paracasei enumeration in yoghurt. Ann Microbiol 66:597-606.
Jespers V, Menten J, Smet H, Poradosu S, Abdellati S, Verhelst R, Hardy L, Buve A, Crucitti T (2012) Quantification of bacterial species of the vaginal microbiome in different groups of women, using nucleic acid amplification tests. BMC Microbiol 12:83.
Kosgodage U et al. (2019) Cannabidiol is a novel modulato of bacterial membrane vesicles. http://doi.org/10.3389/fcimb.2019.00324.
Laniewski P, Ilhan ZE, Herbst-Kralovetz MM (2020) The microbiome and gynaecological cancer development, prevention, and therapy. Nat Rev Urol 17(4):232-250.
Laniewski P, Owen KA, Khnanisho M, Brotman RM, Herbst-Kralovetz MM (2021) Clinical and personal lubricants impact growth of vaginal Lactobacillus species and colonization of vaginal epithelial cells: an in vitro study. Sex Transm Dis 48(1):63-70.
Ley R (2022) The human microbiome: there is much left to do. Nature p. 435
Pino A, Bartolo E, Caggia C, Cianci A, Randazzo CL (2019) Detection of vaginal lactobacilli as probiotic
candidates. Sci Rep 9:3355
Sha BE, Zariffard MR, Wang QJ, Chen HY, Bremer J, Cohen MH, Spear GT (2005) Female genital-tract HIV load correlates inversely with Lactobacillus species but positively with bacterial vaginosis and Mycoplasma hominis. J Infect Dis 191:25-32.
Spiegel CA, Davick P, Totten PA, Chen KC, Eschenbach DA, Amsel R, Holmes KK (1983) Gardnerella vaginalis and anaerobic bacteria in the etioloty of bacterial (nonspeecific) vaginosis. Scand J Infect Dis Suppl 40:41- 46.
Taylor BDP, Darville T, Haggerty CL (2013) Does bacterial vaginosis cause pelvic inflammatory disease? Sex Transm Dis 40:117-122.
Tayo B. (2018) Exploration of the potential for plasma protein binding displacement and drug-drug interactions of valproate in combination with cannabidiol [abstract] Amer Epilepsy Soc Ann Mtg. New Orleans LA.
Ventolini G, Vieira-Baptista P, DeSeta F, Verstraelen H, Lonneee-Hoffmann R, Leeev-Sagie A (2022) The vaginal microbiome: IV. The role of vaginal microbiome in reproduction and in gynecologic cancers. J Lower Genital Tract Dis 26(1):93-98.
Walther-Antonio MRS, Chen J, Multinu F et al. (2016) Potential contribution of the uterine microbiome in the development of endometrial cancer. Genome Med 8:1-15.
Zhou B, Sun C, Huang J et al. (2019) The biodiversity composition of microbiome in ovarian carcinoma patients. Sci Rep 9:1691.

August 17, 2022

Great Brand Design Can Grow Your Business

By Moira Stein

No Comments

As the cannabis industry grows and the category becomes increasingly crowded, package design is more important than ever. Impactful and meaningful branding is key to getting noticed, differentiating from the competition, connecting with consumers and ultimately making the sale. Today’s cannabis labels are more varied than ever before. They can be fun or luxurious, contemporary or retro, colorful or simplistic. Many brands are moving beyond traditional cannabis leaves to more unique, modern, and unexpected interpretations of cannabis plants. Others are forgoing leaf imagery altogether in favor of more evocative graphics, minimal design or mainstream motifs.

While there is no one-size-fits-all design for cannabis packaging, there are many regulatory requirements and branding best practices to consider. We’ve outlined some critical things to keep in mind before starting your cannabis package design.

Know Your Target Audience

Understanding who your target audience is essential for the appropriate design

There are a variety of cannabis users, each with unique needs, interests and attitudes. Understanding who you’re targeting is essential in determining the appropriate brand design strategy. Graphics for millennials will look different than those for baby boomers. But demographics aren’t the only thing to consider when identifying your target consumer. Euromonitor International has identified several lifestyle and personality-driven consumers segments:

Seasoned Consumer – consistent, daily consumer who defies stereotypes and often consider themselves connoisseurs.
Casual Social – regular but not daily consumer who uses cannabis as part of their broader lifestyle.
Dabbler – occasional user who is familiar and comfortable with cannabis but unlikely to use it regularly.
Cannacurious – consumer who is interested in cannabis and demonstrates an openness to using it.

Understanding the motivations of various consumer groups and looking beyond stereotypes or traditional age- and gender-driven demographics can help reach consumers in a more targeted, authentic, and compelling way.

Have a Unique Brand Personality

Concept shots by the Studio One Eleven design division

Design often provides the first impression for a brand, especially in the cannabis category. The first step in developing a winning package design is to determine the best design strategy to differentiate from the competition, communicate your brand story and connect with consumers. Start by thinking about what personality fits your brand, what kind of experience you want to create and what emotions you want to evoke. Do you want to feel healthy and medicinal? Earthy and natural? Sophisticated? Whimsical? Each personality inspires different design solutions. The designers at Studio One Eleven, the Design & Innovation Division of Berlin Packaging, begin each branding project by developing design platform boards that showcase different ways to communicate the brand personality through design, including color, typography, imagery, and more. These platform boards are a great tool to gain alignment on the most effective and appropriate design strategy before digging into tactical design approaches. They can also help guide brand design across other touchpoints, including digital, social media, and advertising.

Understand Regulatory Requirements

Packaging in the cannabis and CBD industries is heavily regulated. In addition to attracting consumers, your package must comply with local, state and federal regulations. Some states mandate that cannabis packaging can’t appeal to children – so no cartoon images or graphics that resemble familiar candy brands. The FDA prohibits cannabis products from making health-related claims, so it is essential to carefully assess the language used on packaging. Vital information such as ingredients, warnings, health risks, impairment of abilities, proper dosage, batch number and more must be included on cannabis labels.

Label material, thickness and texture are tactile elements that can improve the design experience

These are just a few of the package design requirements to consider. Regulations can vary from state to state, so finding a packaging partner who understands the complex and constantly change rules is critical. Berlin Packaging has been a trusted resource for cannabis packaging since 2014. We are uniquely positioned to help cannabis and CBD companies of all sizes in the fast-paced, ever-changing cannabis industry.

Consider All Aspects of Your Package

Beyond graphics, tactile elements can be important to the overall brand design experience. Label material, thickness and texture, embossing and foil stamping, and die-cuts can create a premium impression and add visual interest. Structural design can also help differentiate from the competition and create an elevated user experience. How a package opens and closes, dispenses and doses, and protects and preserves the product inside are all essential considerations. Berlin Packaging has a vast network of manufacturers with hundreds of stock bottles, tins, jars, tubes and closures in a variety of shapes, sizes and materials to choose from, as well as custom solutions available through Studio One Eleven.

Understanding your target consumer, identifying and communicating a unique brand personality, complying with all regulatory requirements and taking a holistic approach will lead to impactful packaging that wins with consumers and grows your business.

August 16, 2022

The Top 3 Ways to Find the Right Automation Tools for Your Cannabis Operations

By Nohtal Partansky

No Comments

In an emerging industry like cannabis, there’s always going to be the latest and greatest tool or technology to improve operations that are just in their infancy. In fact, as a cannabis business operator, it’s likely you hear from at least one or two salespeople a week, selling the next best thing to make your operations that much more efficient.

But, not every piece of technology or tool is well-suited for each individual operation. Even more, some solutions are just temporary band-aids and aren’t built for longevity or for the future maturation of the budding industry.

Of course, at a time when cannabis businesses are struggling to even turn a profit – it’s even more important to look at your processes, and automate or optimize what you can to increase your bottom line.

So, how can you make the right decision when it comes to making an investment in automation technology? Keep reading to learn the top 3 tips for successfully vetting automation tools for efficacy, efficiency and cost-effectiveness.

Tip #1 – Identifying what to automate

The goal of streamlining operations with automation technology isn’t to ‘automate anything and everything’. It’s automating the right parts of production to help scale growth and increase profitability. To do so, operators should look at bottlenecks in their production line or process.

Once you’ve identified the areas that slow production, it’s time to look at which areas are better candidates for automation than others. For instance, tasks that are highly variable are not ideal for automation. That’s because every time a variance occurs, you’ll spend extra time and effort reconfiguring your automation tool or technology to match.

It’s those bottlenecks in production that are repetitive and don’t vary often that are optimal to increase efficiency. For instance – infusing pre-rolls, filling vape carts or packing master cases would be prime candidates for automation.

To dip your toes into the automated waters – find one of those highly repeatable tasks, purchase a small, cost-effective solution and see just how it impacts productivity. If you see that a small change made a big difference – there’s scalability. After this due diligence, you can move forward in contacting more robust manufacturers for improved equipment designed for long-term use and wide scale implementation.

Tip #2 – Choosing the right manufacturer

Speaking of manufacturers – choosing the right one is just as crucial. It shouldn’t come as a shock that not all technology or equipment can be treated equally. If the type of automation technology or equipment you choose is produced by a variety of manufacturers, here are the top things to consider when deciding which is right for you:

Customer support – You might think, ‘how hard can it be’ or fall for the sales pitch that a tool or piece of equipment is so easy to implement – reliable, dependable, and accessible support isn’t necessary. But that could not be farther from the truth. When questions or issues arise with the automation technology you choose – you don’t want to lose time, production, or money while you wait for a solution. Even though technology with customer support may cost more upfront, think of it this way. You’ll either pay up now or later. So, what will you choose? Paying a premium from the start to hit the ground running with 5-star equipment, technology and support? Or, saving a couple of bucks now, just to lose time and productivity due to a lack of customer support and lower-quality technology later.
Manufacturer experience – In cannabis, most manufacturers come from other fields and lend their experience and skills to new areas of operation and production. That means you’ll want to take a hard look at the team’s core roots and where they come from to understand just how their work will translate. Looking for professionals who are trained in high-tolerance, precision engineering is ideal for automation. Working with teams with this temperament ensures that they typically hold themselves to a high standard. Just remember, the team you’ll work with is a culmination of people who create a result. It all comes down to whether the team you choose has a track record of doing so, and how well they’ve served prior customers, too.
Customer reviews – Want to discover how good or bad the team is, beyond what they tell you themselves or before it’s too late? To truly find out, ask their past or current customers.

Tip #3 – Learning from others

Of course, looking at successful operations and what they’ve chosen to automate for efficiency always helps, too. So, what is one common area that operators are increasingly optimizing for significant ROI on automation investments and efforts?

Most operations can increase efficiency by automating labeling.

Label applications. Label application is one process that almost any cannabis business can see an immediate return on investment in, across the board. While other areas of automation will vary and rely heavily on your volume, individual bottlenecks, and unique drops in productivity – most cannabis operations can increase efficiency by automating this non-varying, highly repeatable task.

The Final Word – Using Automation To Your Advantage

Automation technology exists for a good reason. It helps cannabis business operators maximize efficiency, stay in compliance, reduce costs over time and, in turn, increase profits. But the wrong automation technology for your processes won’t do anything of the sort. It will only muddy operations, waste precious capital and set you back in the long run.

So use these three tips to find the right automation technology tools, software and solutions to use to your advantage – before your competitors get a leg up.

August 11, 2022

M&A in Cannabis: A Guide for Buyers and Sellers

By Abraham Finberg, Rachel Wright

No Comments

Mergers and acquisition activity in the cannabis space tripled from 2020 to 2021, and that pace is on track to continue in 2022. With big players entering the global cannabis market, we’re fielding more questions about mergers and acquisitions of cannabis businesses.

In this guide, we look at the evolution of the U.S. cannabis industry and some best practices and considerations for M&A deals in this environment.

The New Reality of Cannabis M&A Activity

The industry has evolved since adult use cannabis was first legalized in some U.S. states in 2012. More cannabis companies have a professional infrastructure—legal, financial and operational—with executive teams and board members ensuring the organization establishes proper governance procedures. Investors and private equity firms are showing more interest, and some cannabis companies have celebrated their first IPOs on the Canadian Securities Exchange (CSE).

At the same time, we are seeing a kind of “market grab” by multistate operators (MSOs) looking to acquire various licenses and expand their market share. MSOs tend to understand the current state of the market. For example, in California and some other states, there is a surplus of cannabis on the market for various reasons, partially due to so-called “burner distribution”—rogue distributors using licenses to buy vast amounts of legally grown cannabis at wholesale prices and selling the product on the black market, thereby undercutting retailers and other legal cannabis businesses. Another reason for the surplus is simply the entrance of many legal cultivators into the market over the past year.

Due to these trends, MSOs are interested in acquiring the outlets to be able to sell the surplus cannabis within California and other new markets.

Transferring Cannabis License Rights

One of the biggest challenges to M&A activity in the cannabis sector is the difficulty of transferring or selling a cannabis license.

Different types of cannabis licenses in California

Cannabis licenses are not expressly transferable or assignable under California law and many other states. However, the parties involved aren’t without options. For example, a business that is sold to a new owner may be able to retain its existing cannabis license while the new owner’s license application is pending, as long as at least one existing owner is staying on board. At the state license level, a change of up to 20% financial interest does not constitute a change in ownership, although the Bureau of Cannabis Control (BCC) must be notified and approve the change.

This process can take a while—often a year or more—since licensing involves overcoming hurdles at the local level as well as the state level with the BCC. It’s crucial to talk with legal counsel about the particulars of the license and location early in the process to best structure the terms of the agreement while complying with state and local requirements.

Seeking a Tax-Free Reorganization in the Cannabis Space

In many cannabis mergers and acquisitions, the goal is to accomplish a tax-free reorganization, where the parties involved acquire or dispose of the assets of a business without generating the income tax consequences that would result from a straight sale or purchase of those assets.

IRC Section 368(a) defines various types of tax-free reorganizations, including:

Stock-for-stock exchanges (IRC Section 368(a)(1)(B)

In a stock-for-stock reorganization, all of the target company’s stock is traded for a portion of the stock of the acquiring parent corporation, and target company shareholders become minority shareholders of the acquiring company.

Often, it’s tough to meet the requirements to qualify for this type of tax-free reorganization because at least 80% of the target stock must be paid for in voting stock of the acquirer.

Additionally, companies may be saddled with too much debt. If the acquirer assumes that debt, it may be classified as consideration paid to the seller and therefore disqualify the transaction as a tax-free reorganization.

In other M&A deals, the acquiring corporation may be unwilling to assume the debt of the target corporation—perhaps because showing these items on its balance sheet would impact its debt-to-equity and other financial ratios.

Stock-for-asset exchanges (IRC Section 368(a)(1)(C)

Rather than acquiring the target company’s stock, the acquirer may purchase its assets. In a stock-for assets exchange, the buyer must purchase “substantially all” of the target’s assets in exchange for voting stock of the acquiring corporation.

A stock-for-assets format offers the buyer the benefit of not having to assume the unknown or contingent liabilities of the target. However, it’s only feasible if the acquirer purchases at least 80% of the fair market value of the target’s assets AND all or virtually all of the deal consideration will be stock of the acquirer.

Tax Consequences Arising from Sale of Assets

If the sale price doesn’t consist primarily of the buyer’s stock, the transaction may be a standard asset sale. This leads to very different tax results.

If the seller is a C corporation, it will typically face double taxation—paying tax once on the sale of assets within the corporation and again when those profits are distributed to shareholders. If the target company has net operating losses (NOLs), it can use those NOLs to offset the tax hit.

If the seller is an S corporation, it won’t have to pay corporate tax on the transaction at the federal level. Instead, shareholders will pay tax on the gain on their individual returns.

For the buyer, the benefit of an asset sale is that the assets acquired get a “step-up basis” to their purchase price. This is beneficial from a tax perspective, as the buyer can depreciate the assets and may be able to claim accelerated or bonus depreciation to help offset acquisition costs.

Reverse Triangular Merger

Often, in practice, we come across what is termed as a reverse triangular reorganization. In this type of merger,

The acquiring company creates a subsidiary,
The subsidiary merges into the target company before liquidating,
The target company then becomes a subsidiary of the acquirer, and
The target company’s shareholders receive cash.

Structuring the deal this way may work to overcome the hurdle of transferring the license but may not qualify as a tax-free reorganization.

Bottom Line

The circumstances and motivations for mergers and acquisitions in the cannabis industry are diverse. As a result, there is no one-size-fits-all approach to structuring the transaction. In any event, it’s crucial to start the process early and seek advice from legal counsel and tax advisors to minimize the tax burden and ensure that both parties to the transaction get the best deal possible. If you need assistance, contact your 420CPA strategic financial advisor.

August 9, 2022

ASTM Approves New Cannabis Standards

By Cannabis Industry Journal Staff

No Comments

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.”

The ASTM D37 committee is working on a number of other standards related to these and they invite anyone interested to share their feedback.