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Current Trends in Banking for Cannabis-Related Businesses

By Paula Durham, CFE, CCCE
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Cannabis is still federally illegal and is included on Schedule 1 of the Controlled Substances Act (CSA), along with such other substances as heroin, fentanyl and methamphetamines.1 It is a federal crime to grow, possess or sell cannabis.

Despite being federally illegal, 36 U.S. states and the District of Columbia have legalized the sale and use of cannabis for medical and/or adult use purposes,2 and both direct and indirect cannabis-related businesses (CRBs) are growing at a rapid rate. Revenue from medical and adult use cannabis sales in the US in 2019 is estimated to have reached $10.6B-$13B and is on track to reach nearly $37B in 2024.3

Because the sale of cannabis is federally illegal, financial institutions face a dilemma when deciding to provide services to CRBs. Should they take a significant legal risk or stay out of the market and miss out on a significant revenue opportunity? So far, the vast majority of financial institutions have been unwilling to take the risk, resulting in a dearth of options for CRB’s. Until recently, cannabis business operators had few options for financial services, but times are changing.

This piece will discuss current trends in banking for cannabis-related businesses. We will cover differences in legality at state and federal levels, complexities in dealing in cash versus digital currencies, Congressional actions impacting banking and CRBs and how banking is changing. The explosion of state legalization of cannabis over the past several years has had a strong ripple effect across the US economy, touching many industries both directly and indirectly. Understanding the implications of doing business with a CRB is both challenging and necessary.

Feds Versus States

Money laundering is the process used to conceal the existence, illegal source or illegal application of funds.4 In 1986 Congress enacted the Money Laundering Control Act (MLCA), which makes it a federal crime to engage in certain financial and monetary transactions with the proceeds of “specified unlawful activity.”5 Therefore, CRB transactions are technically illegal transactions under the MLCA.

Financial institutions therefore face a risk of violating the MLCA if they choose to do business with CRBs, even in states where cannabis operations are permitted. In addition, financial institutions could also face criminal liability under the Bank Secrecy Act (BSA) for failing to identify or report financial transactions that involve the proceeds of cannabis businesses operating legally under state law.6

Federal authorities continued to aggressively enforce federal cannabis laws

In short, because cannabis is illegal at the federal level, processing funds derived from CRBs could be considered aiding and abetting criminal activity or money laundering. States, however, began legalizing cannabis in 1996, and by 2009, thirteen states had laws allowing cannabis possession and use.7 Despite this legislation, federal authorities continued to aggressively enforce federal cannabis laws.8 That changed under the Obama administration when, shortly after being elected, President Obama stated that his administration would not target legal CRB’s who were abiding by state laws.[9] In an attempt to provide clarity in this murky environment, beginning in 2009, the Department of Justice (DOJ) issued three memos designed to guide federal prosecutors in this area. However, none of the DOJ memos issued from 2009 through 2013 addressed potential financial crime related to the legal sale or distribution of cannabis in states allowing the use of medicinal or recreational cannabis.

To assist financial institutions in navigating potential financial crime implications of banking CRBs, the Financial Crimes Enforcement Network (FinCen) issued guidance in 2014 that clarified how financial institutions could conduct business with CRBs and maintain compliance with their Bank Secrecy Act requirements (2014 Guidance).9 According to the 2014 Guidance, financial institutions may choose to interact with CRBs based on factors specific to each institution, including the institution’s business objectives, the evaluated risks associated with offering such services, and its ability to manage those risks effectively.

The 2014 Guidance requires those who choose to provide services to CRBs to design and implement a thorough customer due diligence review that includes, in part, analyzing the licensing of the entity, developing an understanding of the business operations of the entity, and ongoing monitoring of the entity.9 In addition, financial institutions are required to file a Suspicious Activity Report (SAR) for every transaction they process for a CRB, should they choose to accept the business.

Although the 2014 Guidance does outline a path for financial institutions to engage with CRBs, it does not change federal law and, therefore, does not eliminate the legal risk to financial institutions.10 By its very nature, the 2014 Guidance was a temporary fix, subject to changing views of different administrations, evidenced by the fact that all three of the DOJ guidance documents noted above were rescinded by then Attorney General Jeff Sessions on January 4, 2018.12 The DOJ enforcement posture could change once again in a Biden administration. Biden is on record as favoring decriminalization, and Attorney General candidate Merrick Garland has stated that if confirmed he will deprioritize enforcement of low-level cannabis crimes. Garland also believes using limited government resources to pursue prosecution of cannabis crimes states where cannabis is legal does not make sense.12

Because of the uncertainty and high risk, most banks remain unwilling to serve CRBs. Those that do serve CRBs charge exorbitant fees (fees of $750-$1,000 or more per account per month are not uncommon), pricing many smaller operators out of the financial services market.

Cash is King – Or Is It?

Cannabis operators have discovered the old adage “cash is king” is not necessarily true when it comes to the cannabis space. Bank-less CRBs are forced to utilize cash to pay business expenses, which can be particularly difficult. Utility companies, payroll companies, and taxing authorities are just some of the providers that are difficult, if not impossible, to pay in cash. For example, cannabis operators have been turned away from IRS offices when attempting to pay large federal tax obligations in cash. Likewise, cannabis operators have been unable to utilize payroll processing companies to administer payroll and benefits for their businesses because the processors won’t take cash. CRBs can’t use Amazon or other online retailers because online providers cannot accept cash.

Because dealing in cash is so difficult, CRB operators look for workarounds such as using personal credit/debit cards to purchase business equipment and supplies. This doesn’t eliminate the cash problem, however, because the credit card holder will likely have to accept cash as reimbursement. Such transactions could be considered an attempt to hide the source of the cash, which is, by definition, money laundering.

CRBs often have large sums of money onsite

Some bank-less CRBs try to skirt the system by obtaining bank accounts in the name of management companies or other entities one step removed from the actual business. While operators often choose this route in an effort to streamline business and operate out of the shadows, it again runs afoul of banking laws. Transferring cannabis related financial transactions to another entity is actually the very definition of money laundering – which, as noted above, is defined as the process used to conceal the existence or source of “illegal” funds.

In addition to the difficulties in making payments or purchasing business supplies, operating in a cash-heavy environment poses significant safety risks for cannabis operators. CRBs often have large sums of money onsite and transport large sums of cash when purchasing product or paying bills, making them a target for robbery. In 2017, there was a spate of dispensary robberies across the Phoenix Metro area, including one at Bloom Dispensary that took place during operating hours.13

Managing all that cash increases the cost of doing business as well, in the form of increased labor, insurance, and security costs. Cash must be counted and double counted, which can be time consuming for staff, not to mention the time it takes to deliver physical cash payments to hither and yon. Ironically, lack of banking significantly decreases transparency and clouds the waters of compliance, as operating strictly in cash makes it easier to manipulate reported financial results.

Potential Congressional Solutions

In recent years Congress has undertaken several efforts to pass legislation designed to address the state/federal divide on cannabis, which would likely clear the way for financial institutions to provide services to CRBs, including:

  • R. 1595 – Secure and Fair Enforcement Banking Act of 2019 (“SAFE Act”);
  • 1028 & H.R. 2093 – Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act); and
  • 2227 – Marijuana Opportunity Reinvestment and Expungement Act of 2019 (MORE Act).

The climate in Washington DC, however, did not allow any of these initiatives to pass both houses of congress. Had any been sent to the White House, President Trump was unlikely to sign them into law.

The cannabis industry has new reason to believe reform is on the horizon with shift in political leadership in the White House and Senate. Newly anointed Senate Majority Leader Chuck Schumer recently committed to making federal cannabis reform a priority, and President Biden appears committed to decriminalization, reviving the hope of passage of one of these pieces of legislation.

The Changing Banking Landscape

Even though there is little in the way of formal protections for financial institutions, and with the timeline for a legislative fix unknown, an increasing number of banks are working with cannabis operators.

According to FinCen statistics, there were approximately 695 financial institutions actively involved with CRBs as of June 30, 2020. It is important to note that these statistics are based on SAR filings, which banks are required to file when an account or transaction is suspected of being affiliated with a cannabis business. However, some of these SARs may have been generated on genuine suspicious activity rather than on a transaction with a known cannabis customer.

Number of Depository Institutions Actively Banking
Cannabis-Related Businesses in the United States
(Reported in SARS)14

There are arguably more banking institutions offering services to CRBs than ever before. The challenges for CRBs are (1) finding an institution that is willing to offer services; (2) building/maintaining a compliance regime that will be acceptable to that institution; and (3) cost, given the high fees associated with these types of accounts. 

How CRBs Get Accepted by Banks

The gap between CRBs’ need for banking and the financial services providers’ sparse and expensive offerings to the sector has created an opportunity for third-party firms to intervene and provide a compliance structure that will satisfy the needs of the financial institutions, making it easier for the CRB to find a bank.

These third-party firms perform extensive BSA-compliant due diligence on applicants to ensure potential customers are following FinCen guidance required to receive banking services. After the completion of due diligence, they connect the CRBs with financial institutions that are willing to do business with CRBs and provide checking/savings accounts, check writing capability, and merchant processor accounts. These firms often provide additional services such as armored car and cash vaulting services. Some of these firms also offer vendor screening, pre-approving vendors before any payments can be made.

One such firm, Safe Harbor Private Banking, started as a project implemented by the CEO of Partners Credit Union in Denver, Colorado, who set out to design a cannabis banking program that would allow Partners to do business with Colorado CRBs.15 The program was successful and has since expanded into other states who have legalized cannabis. Other operators include Dama Financial and NaturePay.

While these services offer hope for many CRBs, the downside is cost. These services perform the operations necessary to find, open, and maintain a compliant bank account; however, the costs of compliance are still high, pricing some small operators out of the market.

Is Digital Currency an Answer?

 Digital currency is also making its way into the cannabis world. Digital currency, or cryptocurrency, is a medium of exchange that utilizes a decentralized ledger to record transactions, otherwise known as a blockchain. One of the largest benefits of blockchain is that it is a secure, incorruptible digital ledger used for, among other things, financial transactions.16 Blockchain technology offers CRBs a transparent and immutable audit trail for business and financial transactions. Several cannabis-specific cryptocurrencies have sprung up in the past several years, including PotCoin, CannabisCoin, and DopeCoin, to name a few.

In July 2019, Arizona approved cryptocurrency startup ALTA to offer services to the state’s medical cannabis operators.17 ALTA describes itself as a “digital payment club where cash-intensive businesses pay each other using digital tokens instead of cash.”18 ALTA members purchase digital tokens that are used to pay other members using a proprietary blockchain based system. The tokens are redeemable for US dollars at a stable rate of 1:1, and CRBs do not need a bank account to participate in the ALTA program.

ALTA proposes to pick up members’ cash and exchanges it for tokens, which are then used to pay other members for goods and services. Tokens may be redeemed for cash at any time.18 The company has been approved by the Arizona State Attorney General, and one of the first members they hope to enlist is the Arizona Department of Revenue (ADOR). Enlisting ADOR into the program would allow dispensary members to pay state taxes digitally rather than hauling large amounts of cash to ADOR offices.

Similarly, Nevada recently contracted with Multichain Ventures to supply a digital currency solution to the Nevada cannabis industry. Nevada Assembly Bill 466 requires the state create a pilot program to design a “closed loop” system like Venmo in an effort to reduce cash transactions in the cannabis sector. Like ALTA, Nevada’s proposed system will convert cash to tokens which can then be transacted between system participants.19

While both proposals are promising for Arizona and Nevada CRBs, the timeline as to when, or if, these offerings will come online is unknown. Action on cannabis reform at the federal level may render these options moot.

Looking to the Future

Although states are legalizing cannabis in one form or another in growing numbers, the fact that cannabis is still federally illegal poses a significant barrier to accessing the financial services market for CRBs. While most banks are still reluctant to offer services to this rapidly growing industry, there are more banks than ever before willing to participate in the cannabis industry. Recent changes in leadership in Washington DC offer a positive outlook for cannabis reform at the federal level.

As the “green rush” continues to envelop the country, financial services options available to CRBs are slowly growing. Many new options are now available to help CRBs find a bank, develop compliance programs, and manage the cash related problems encountered by most CRBs. However, these solutions may be out of reach for the budget-conscious small operator. Also, there are a number of cryptocurrency solutions designed specifically for CRBs; however, when, or if, these solutions will gain significant traction is still unknown.

References

  1. Controlled Substances Act, 21 U.S.C., Subchapter I, Part B, §812.
  2. “State Marijuana Laws”; National Conference of State Legislatures, February 19, 2021.
  3. “Exclusive: US Retail Marijuana Sales On Pace to Rise 40% in 2020, near $37B by 2024”. Marijuana Business Daily, June 30, 2020.
  4. Kaufman, Irving. “The Cash Connection: Organized Crime, Financial Institutions, and Money Laundering”. Interim Report to the President, October 1984.
  5. S. Code § 1956 – Laundering of Monetary Instruments.
  6. Rowe, Robert. “Compliance and the Cannabis Conundrum.” ABA Banking Journal, September 11, 2016.
  7. “History of Marijuana as a Medicine – 2900 BC to Present”. ProCon.org, December 4, 2020.
  8. Truble, Sarah and Kasai, Nathan. “The Past – and Future – of Federal Marijuana Enforcement”. org, May 12, 2017.
  9. FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses.
  10. Cannabis Banking Coalition Statement.
  11. Sessions, Jefferson B. “Memorandum for All United States Attorneys”. January 4, 2018.
  12. “Attorney General Nominee Garland Signals Friendlier Marijuana Stance”. Marijuana Business Daily, February 22, 2021.
  13. Stern, Ray. “Robbers Hitting Phoenix Medical Marijuana Dispensaries: Is Bank Reform Needed?” The Phoenix New Times, April 11, 2017.
  14. FinCen Marijuana Banking Update, June 30, 2020.
  15. Mandelbaum, Robb. “Where Pot Entrepreneurs Go When the Banks Just Say No.” The New York Times, January 4, 2018.
  16. Rosic, Ameer. “What is Blockchain Technology? A Step-by-Step Guide for Beginners.” com, 2016.
  17. Emem, Mark. “Marijuana Stablecoin Asked to Play in Arizona Fintech Sandbox.” CCN.com, October 25, 2019.
  18. http:\\Whatisalta.com\
  19. Wagner, Michael, CFA. “Multichain Ventures Secures Public Sector Contract with Nevada to Supply Tokenized Financial Ecosystem for the Legal Cannabis Industry”, January 26, 2021.

Could 2021 Be the Year of Federal Cannabis Legalization?

By Bryan Johnson
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The legalization of cannabis in the U.S. has been long in the making. Back in the early 1970s, states such as Oregon, Texas and Colorado began the process of decriminalizing small amounts of cannabis. Fast forward 50 years or thereabouts, and the momentum toward legalization is undeniable.

True, cannabis remains illegal at the federal level, but state after state is legalizing the substance for medical and adult use. California was the first to do so for medical usage in 1996. Since then, several others have jumped on the medical cannabis bandwagon, and a total of 19 states have legalized cannabis for adult use. It seems, then, that it’s just a matter of time before the federal government follows suit.

A Bit of Background 

There are two key federal laws concerning cannabis that criminalize its use: the Comprehensive Drug Abuse Prevention and Control Act (CDAPCA) and the Controlled Substances Act (CSA), which is part of the CDAPCA. The CSA became effective in 1971 and grouped cannabis along with heroin, LSD and cocaine as Schedule I drugs that are tightly regulated and deemed illegal by the federal government. For its part, the CDAPCA, also enacted in the 70s, was an element of the U.S. “War on Drugs,” and served to significantly restrict manufacturing and distribution of cannabis, among other substances, and amp up related security laws.

Times have certainly changed over the decades, and so has public sentiment about cannabis use. In fact, over 91% of U.S. adults say that cannabis should be legal for adult use or medical use—this according to the Pew Research Center. Clearly, more and more states are hearing this message loud and clear given the uptick in jurisdictions legalizing the substance, be it for medical or adult use purposes.

The Booming Legal Cannabis Market

The legal cannabis business is on fire, with recent estimates suggesting that the size of the global market will climb to $84 billion by 2028. This is a staggering number that spells opportunity for budding (pun intended) entrepreneurs in the U.S. and beyond, not to mention tax authorities. It gets even better when taking into account the popularity of CBD products. CBD, which is derived from the cannabis plant but does not contain THC and is legal in the U.S., has become an integral part of the wellness industry. Experts predict that the global CBD market is on its way to reaching a value of $55 billion in years to come.

What This All Means for the Future of Cannabis at the Federal Level

No doubt about it, legal cannabis is big business. But that business is being thwarted by the failure of the federal government to change course and legalize the substance. With cannabis still considered a Schedule I drug, federal banks are unable to provide access to financial services for companies selling cannabis-related products. As otherwise stated, because federal law makes cannabis illegal, banks cannot do business with cannabis companies, which is problematic for so many reasons.

Sen. Schumer unveiling the Cannabis Administration and Opportunity Act

But good news could be on the horizon. The SAFE Banking Act of 2021, which would provide a safe harbor for banking institutions providing services to cannabis clients, was passed in the U.S. House of Representatives and referred to committee. Whether the legislation passes in its current form is anyone’s guess, though our federal legislature does seem to be nearing the relaxation of existing cannabis restrictions.

This is evidenced as well in the U.S. Senate, where the Cannabis Administration and Opportunity Act was recently introduced and is currently pending. That legislation would, among other things, remove cannabis from the CSA, introduce regulations to tax cannabis products, expunge prior convictions, and maintain the authority of states to set their own cannabis policies.

Of course, there’s no certainty that 2021 will be the year when cannabis is finally legalized (or at the very least, decriminalized) federally. Still, we’re closer to that eventuality than ever before.

Kaycha Labs Joins NIST’s CannaQAP

By Cannabis Industry Journal Staff
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Kaycha Labs, a cannabis lab testing company headquartered in Fort Lauderdale, Florida, has announced their participation in the National Institute of Standards and Technology’s (NIST) Cannabis Quality Assurance Program (CannaQAP).

The NIST is an organization under the U.S. Department of Commerce that promotes innovation through standards, technology and advancing science. The NIST’s CannaQAP platform works with cannabis labs to help improve competence in analytical science and standardization.

The program requires participating labs to conduct exercises that help inform the NIST about current industry standards and capabilities for hemp and cannabis testing. One of the goals of the program is aiding in the design and characterization of cannabis reference materials.

Kaycha Labs took part in two exercises for the CannaQAP study. Exercise 1 included testing for potency with 17 cannabinoids in hemp oil and Exercise 2 included potency, heavy metals and moisture content testing in plant materials.

Chris Martinez, president of Kaycha Labs, says the program can benefit the entire industry when it comes to regulatory compliance testing. “As a leading cannabis lab company with a network of labs in multiple states, it is imperative we demonstrate that our labs apply compliant and consistent testing methodologies,” says Martinez. “Assuring all industry participants, including State and Federal government regulators, that precise and consistent testing data is the norm will benefit the entire industry.”

Kaycha Labs, while based in Fort Lauderdale, actually has cannabis testing labs in California, Colorado, Florida, Massachusetts, Nevada, Oklahoma, Oregon and Tennessee, making them an ideal candidate for CannaQAP.

Exercise 1 has been completed in its entirety and published here. Exercise 2 has completed the participation and data submission legs of the study and NIST is preparing it for publication. On their website, it says that announcements about their upcoming Exercise 3 are coming soon.

4 Trends Propelling the U.S. Cannabis Testing Market: 2021-2027

By Priya Deshmukh
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As the legalization of cannabis in the U.S. continues to grow, stringent regulatory requirements around the country are being adopted to ensure that only safe and high-quality cannabis is sold. The U.S. cannabis testing market is estimated to see tremendous growth over the coming years. Further, the FDA has made several resources available for addressing cannabis products like CBD to ensure that consumers and stakeholders are getting safe products.

According to Global Market Insights, Inc., U.S. Cannabis testing market size is projected to surpass USD 4.1 billion at a CAGR of 10.4% through 2027, in light of below mentioned trends:

Strategic initiatives by major industry players

HPLC (high pressure liquid chromatography) instrument.

Prominent players operating in the U.S. cannabis testing market such as CannaSafe, Anresco, Collective Wellness of California, EVIO Inc., Digipath Inc., PSI Labs, SC Labs, Inc., Steep Hill, Inc. etc. are focusing on developing enhanced cannabis testing solutions and accreditation for gaining strong market presence. For example, earlier this year SC Labs developed a comprehensive hemp testing panel that is purported to meet testing standards in every state with a hemp program.

Citing another instance, in 2019, a leading cannabis resource Leafly, introduced the Leafly Certified Labs Program, under which a network of labs is independently assessed by Leafly for quality and accuracy. This program has been designed to address inconsistency in cannabis testing by ensuring that lab data comes from labs that have been confirmed to provide accurate results.

Rising adoption of high-pressure liquid chromatography (HPLC) technique

A lot of cannabis testing procedures are carried out using liquid chromatography. It is estimated to witness higher preference over the coming years. In 2020, the liquid chromatography segment recorded a valuation of USD 662.4 million. Further, liquid chromatography is a valuable alternative to gas chromatography when it comes to analysis of cannabinoids, pesticides and THC which is why this technology is often preferred for potency testing as it offers more precise analysis. Moreover, purification standards are highly controlled in liquid chromatography which helps in obtaining accurate results, which is complementing the segment growth.

Growing popularity of heavy metals testing for cannabis

Cannabis samples are liquified in strong acid in a pressurized microwave prior to evaluation for heavy metal content. Image courtesy of Digipath, Inc.

Heavy metals are known to be one of the major contaminants found in cannabis and its products apart from residual solvents, microbial organisms and pesticides. In addition, heavy metals are highly toxic in nature and on exposure can lead to poisoning and other complications. As a result, heavy metal testing for cannabis and its products is increasingly becoming popular. Several government organizations have made heavy metal testing mandatory for cannabis products. Moreover, increasing legalization of cannabis across several countries for adult use and medical purposes is likely to instigate the demand for heavy metal testing of cannabis products, thereby fostering the growth of heavy metals testing segment over the coming years. For the record, in 2020, the segment had recorded a market revenue of USD 352.5 million.

Increasing support from government bodies in the Mountain West

With increasing legalization for medical and adult use, the cannabis testing market in the Mountain West zone of the U.S. is likely to observe a tremendous growth over time. Moreover, growing support from various government bodies is playing a key role in enhancing the business space. For example, Montana’s Department of Revenue helps labs get licensed along with the state’s environmental laboratory that oversees inspections and licensing. Further, presence of a large number of cultivators of cannabis and manufacturers of cannabis-based products are also positively influencing the regional market growth. Considering the significance of these growth factors, the U.S. cannabis testing market in the Mountain West is estimated to register a substantial CAGR of 9.6% through 2027.

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The Real Reason Some Industry Leaders Want Delta 8 Banned

By Robert Johnson
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As sales of Delta 8 increase, hemp and cannabis industry infighting increases right along with it. Some hemp leaders say they object to Delta 8 simply because it’s intoxicating: “Hemp is nourishing….hemp is not intoxicating,” the president of the U.S. Hemp Authority President told Hemp Grower (apparently cannabinoids can only be one or the other). Others claim that Delta 8 itself is unsafe: “Very little is known about the health effects of Delta 8,” warned the media relations director for the National Cannabis Industry Association. The U.S. Cannabis Council called Delta 8’s growing popularity “a rapidly expanding crisis” in a report that includes the heading “The Health Risks of Delta-8 THC” and claims Delta 8 “presents a public health risk of potentially wider impact than the vape crisis.”

As a cannabis and hemp industry veteran and a long-time maker of numerous hemp-derived formulations (including Delta 8 products) I have to ask: who exactly is Delta 8 a crisis for, and why? I agree that we need to address the legitimate issues with Delta 8 manufacturing and create regulatory oversight that ensures consumer safety. But some Delta 8 critics may be more concerned with their own bottom line than with protecting public health. No one wants another vaping crisis, but demonizing a newly popular cannabinoid or trying to get it banned doesn’t solve the problem of an unregulated space—and it won’t end the demand for Delta 8, either.

The chemical structure of Delta 8 THC.

John Kagia of New Frontier Data points out that the Delta 8 boom is “a phenomenon that has taken the industry quite by storm”—and while that storm’s rising tide saved many hemp farmers from financial ruin, it has not lifted every boat. Some cannabis leaders consider Delta 8 an incursion into “their” market. Indeed, Delta 8 can be sold in some states where cannabis remains illegal: “Unregulated Delta 8 risks becoming a competitive threat to [cannabis companies’] existing offerings, sold in states they can’t get into,” reported Tiffany Kary at the Chicago Tribune. But the threat here for cannabis operators isn’t Delta 8: it’s Prohibition. In states where cannabis is illegal, Delta 8 (which is remarkably similar in molecular structure to its federally illegal chemical cousin Delta 9) is being purchased as an alternative. Rather than villainizing a cannabinoid, let’s address retrograde, reactionary state legislatures that refuse to listen to the will of their constituents, and outdated federal laws that equate THC with heroin.

Many see Delta 8 as a threat to the licensed cannabis industry’s profit margins, not only because it can be sold in prohibition states, but because its unregulated status makes it far easier and cheaper to make and sell. Cannabis companies have to navigate an overwhelming and burdensome maze of regulatory red tape to maintain compliance, so industry-wide frustration with the total lack of oversight for Delta 8 is both understandable and justified. But calling for statewide bans on a product that competes with yours is not the solution. That’s not how markets work. (Of all people, cannabis industry professionals should know that banning cannabinoids doesn’t make them go away.) Regulating Delta 8 manufacturers and requiring rigorous product testing are reality-based measures that will make the playing field fairer for cannabis while also safeguarding public health. In the meantime, we can strongly encourage Delta 8 consumers to seek out products made by ethical operators that are transparent about their manufacturing process and provide third-party testing results—the exact same protocol we recommend for buying CBD.

Some of the many hemp-derived products on the market today.

The safety of Delta 8 products is another legitimate concern that’s unfortunately been distorted. Some alarmist headlines seem to equate the actual cannabinoid itself with hazardous material. One East Coast CBD manufacturer issued a press release announcing “a warning for consumers and manufacturers about potentially harmful chemicals within Delta 8 THC” with the cable-newsworthy headline “Dangerous Delta 8?” Smearing Delta 8 as an inherent health menace is both misleading and unhelpful. As Rick Trojan, vice president of the board of directors of the Hemp Industries Association points out, “Cannabinoids themselves have never in the history of humanity caused a death by themselves.” Once again, the problem here isn’t the actual cannabinoid: it’s the lack of regulation that allows Delta 8 products to be produced with no oversight or testing. But given Delta 8’s widespread popularity, short-sighted bans like the ones that have been passed in 17 different states will only increase the risk to public health. Retailers nationwide sold at least $10 million worth of Delta 8 products last year. I guarantee that demand will continue, and that these bans will simply empower an illegal market full of bad actors.

Finally, I remain shocked at the contempt aimed at Delta 8 because it’s psychoactive, and at those who consume it for just “wanting a cheap high.” As with all cannabinoids, we need more clinical research into Delta 8’s properties—but the research we do have indicates that Delta 8 actually has therapeutic properties very similar to Delta 9 THC, just with less psychoactivity. Anecdotal reports indicate that Delta 8 offers many of the health benefits of Delta 9 (help with sleep problems, stress, and pain management) without THC’s less-enjoyable side effects, like paranoia. As cannabis specialist and medical doctor Peter Grinspoon told Insider, “I can’t tell you how many patients I have who say, ‘I’d love to use medical cannabis instead of opiates for pain, except it makes me anxious.’ Delta-8 might be a very good option for people like that.” Believe it or not, there are plenty of people who are using Delta 8 for its therapeutic effects—which, in a nation where 136 citizens die from opioid overdoses daily, I think should be encouraged rather than derided.

With more than 140 known cannabinoids, it makes no sense for us as an industry to brand some of them as “bad” and others as “good.” Are we going to have these tugs-of-war and calls for bans over every single cannabinoid that becomes popular? Instead of arguing amongst ourselves, we could instead focus our efforts on legalizing all of these plant compounds, studying them to determine their capabilities, and creating standardized, evidence-based regulations and testing regimens to ensure consumer safety and adult use. Delta 8 is popular because it serves a need. Consumers want it, and it’s here to stay—the sooner that we as an industry recognize those facts, the better.

Craft Beer & Cannabis: Oskar Blues Founder Joins Veritas Fine Cannabis

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In 2002, Dale Katechis revolutionized craft beer. A seemingly simple packaging decision, putting craft beer in a can, sparked an international movement and put craft beer on the map.

Before the craft beer market really gained steam, consumers associated good beer with glass bottles and larger brands selling cheap beer with cans. Through education, creative marketing and a mission to put people over profits, Dale helped the craft beer market expand massively while sticking to his roots. He also managed to convince people to drink good beer from a can.

When Dale founded Oskar Blues about twenty years ago, he didn’t just succeed in selling beer. Through collaboration and information sharing, Dale propelled craft beer as a whole and lifted all boats with a rising tide. He’s hoping to achieve similar results with his new role in the cannabis space.

Dale Katechis, Founder of Oskar Blues & recent addition to the Veritas Fine Cannabis team

Veritas Fine Cannabis, the first craft cannabis cultivator in Colorado, announced that Dale joined the company’s leadership team. Jonathan Spadafora, partner and head of marketing and sales at Veritas, told us that he’s excited about working with Dale. He says Dale is already helping them open a whole world of branding and marketing opportunities. “This is our Shark Tank moment – we’ve got someone who’s been through the fire before and will help us keep differentiating, finding new avenues and new ways to solve problems,” says Spadafora.

His colleague, Mike Leibowitz, CEO of Veritas, shares the same sentiment. “Dale maintained company culture and quality as he grew Oskar Blues into a household name,” says Leibowitz. “Maintaining our unique company culture is paramount as we work to build Veritas Fine Cannabis into the same.”

Dale’s role in the leadership team at Veritas is about sticking to his roots. Through raising industry standards in the best interest of quality products and consumers, the team at Veritas hopes to expand the brand nationally, just like Oskar Blues did, while instilling a culture of disruption and innovation without compromising quality.

We caught up with Dale to learn more about his story and what he hopes to bring to Veritas, as well as the cannabis industry at large. And yes, I had a couple of Dale’s Pale Ales (his namesake beer) later that evening.

Aaron Biros: Your success with Oskar Blues is inspiring. Taking an amazing beer like Dale’s Pale Ale and putting it in a can sounds simple to the layperson, but you launched a remarkable movement to put craft beer on the map. How do you plan to use your experience to help Veritas grow their business?

Dale Katechis: I am hoping that I can apply some of the lessons that I’ve learned through making mistakes of growing a business from the ground up. There’s obviously a lot of road blocks in cannabis and that is certainly one of the qualities of Veritas – how they’ve grown and how they had to do it in an environment that is much more challenging than the beer space.

My experience in small business development could potentially help them navigate this next renaissance of the space. I’m going to help them compete and bring the industry to a level that helps everybody win. I certainly felt that way in the craft beer movement. It was very important to us to bring the whole industry along because we were educators, we weren’t salesmen. In doing that, lifting everyone to a level where the industry benefits as a whole is a part of small business growth. To me that’s the most fulfilling part. It wasn’t just about the Oskar Blues ego at the time, it was about the craft beer scene. And what’s happening in cannabis now is very similar to what happened in the nineties with the craft beer scene.

Aaron: How did you get interested in joining the cannabis industry? What made you choose Veritas?

Dale: Most of my life, I’ve been an enjoyer of cannabis. Very recently, in the last two years, I’ve been intrigued by getting involved in the space. I’ve been shopping around for opportunities and nothing really excited me until I met Jon Spadafora and Mike Leibowitz.

It was really the two of them, the comradery and how they treat their staff that was so similar to the culture at Oskar Blues. Call it a “passion play” if you will, but this was the best opportunity to get involved with a small company and hopefully be a value add for them being in the room and sharing ideas.

Aaron: As a pioneer and leader in the craft beer space, do you notice any commonalities between the growth of the craft beer market and the legal cannabis market?

Dale: It is kind of crazy how many similarities there are. Not just the industry as a whole, but specifically the commonalities between my business, Oskar Blues, and Veritas. Overall, that’s really what allowed me to want to lean in a bit more. I wasn’t in the place where I wanted to start anything on my own. I didn’t want to be involved in fixing anything. I’ve been involved in those situations before and I’m at a point in my life that I don’t want to fix anything. Thankfully there’s nothing that needed to be fixed at Veritas. That was an exciting piece of the equation for me.

Dale takes in the view, getting up close and personal with the plants at a Veritas cultivation facility

Back to your question, how the consumer looks at cannabis versus how the consumer looks at beer in the craft beer space is very similar. There is a bit of an educational piece that’s happening where it’s almost a requirement in the cannabis industry and Veritas is leading that charge out front.

That’s what’s going to catapult Veritas and other companies if they follow suit. It’s their mentality and their philosophy of bringing the industry along as a whole, and I think it’s going to end up boding well for the consumer. The craft beer space was the same.

We had to educate people on a beer can and why we felt like a can of beer was important and exciting. The industry and the consumer associated cans of beer with large, industrial lagers and the can got a bad rap as a result. Not because it wasn’t a great package, but because they were putting bad beer in a good package. So, we had a long road of educating the consumer on the benefits of the can and I think what Veritas is doing with packaging now, how they use quality as such a fundamental pillar of their business, how they focus on the employee experience and the consumer experience sets them up for success, instead of just looking at the bottom line.

I’ve said it throughout my entire career, and at Oskar Blues, we never focused on the profits. You do the right thing for the biggest group of people moving the ball forward and the bottom line takes care of itself. Jon and Mike understand that so I don’t need to fight that battle. It’s another big similarity to the craft beer space.

Aaron: How can cannabis companies keep their craft? How can we, as an industry and as individual businesses, celebrate craft cannabis and follow in the footsteps of independent craft beer?

Dale: I believe that we’re starting to see some of that consolidation [that has been taking place in the craft beer market]. We’re at a time in the market right now where companies with such a solid foundation like Veritas don’t need to go that route to grow. I think we’ll start to see a lot more consolidation in the cannabis industry soon.

Veritas CEO Mike Leibowitz (right) showing Dale (left) a fresh harvest

Back to the point of bonding together as an industry and as a whole. Championing some of the regulatory hurdles that are coming and sticking together is crucial. One company can’t do it. There’s going to have to be some comradery in the industry among everyone trying to hold the bar up high instead of racing to the bottom. You die by a thousand cuts. I’ve lived that life in craft beer and we saw what happened 6-7 years ago when the industry overexpanded because of exponential growth. A lot of egos got in the room, and a lot of breweries spent a lot of money building out capacity and then that same year the market popped out. Everyone who didn’t have a solid foundation, got washed out of the industry.

That’s why I appreciate what Jon and Mike are doing and how they built Veritas. It’s very similar to how we built Oskar Blues. We had humble beginnings; we didn’t spend money on things outside of our core competency. We focused on quality, employee experience, morale and holding on to the culture of Oskar Blues. That’s what Jon and Mike are doing with Veritas and I think that’s really important.

Flower-Side Chats Part 8: A Q&A with Andreas “Dre” Neumann, Chief Creative Director of Jushi Holdings Inc.

By Aaron Green
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In this “Flower-Side Chats” series of articles, Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses integrate innovative practices to navigate a rapidly changing landscape of regulations, supply chain and consumer demand.

Jushi Holdings Inc. (OTCMKTS: JUSHF | CSE: JUSH) is a multi-state operator with a national footprint and core markets in Illinois, Pennsylvania and Virginia, with developing markets in California, Nevada, Massachusetts and Ohio. In addition, Jushi maintains offices in Colorado, New York and Florida. In Q1 2021 they posted $42M in revenue representing 30% growth over Q4 2020 and 77% of their sales were conducted online. Jushi brands include Beyond / Hello, The Bank, The Lab, Tasteology, Sēchē, Nira CBD and Nira+ Medicinals.

We interviewed Andreas “Dre” Neumann, Chief Creative Director of Jushi Holdings. Dre joined Jushi in February 2020 after connecting to the founders through a colleague and running a large user experience research project. Prior to Jushi, Dre cut his teeth in advertising and branded entertainment. He was a startup founder at TalentHouse.com and a Partner at Idean, which he later sold to Capgemini.

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

Andreas Neumann: I’m a guy who has been interested in many genres – I’m always looking for the next big thing. I started out in advertising and then I faded into branded entertainment when the traditional advertising wave was kind of shaky due to the digital attack of the internet with platforms like Facebook and Myspace.

I’ve also been fascinated by digital which led me to move into Silicon Valley. I had a startup called TalentHouse.com which was like LinkedIn for creative people. I learned a lot there about building a company in Silicon Valley. It was the first time I was confronted with experienced customer and user experience people. CX and UX was already kind of a thing in Silicon Valley at the time. My last company I was a partner in was a company called Idean, a Silicon Valley-based user experience company which we sold to a French company called Capgemini about four years ago.

I continue to be involved in the entertainment industry as kind of a creative outlet. I’m working with a lot of big rock bands like The Foo Fighters and Queens of the Stone Age. I just did the last Foo Fighter album. Photography is my last domain of total creativity where I can do whatever I want specifically in the rock business.

Andreas “Dre” Neumann, Chief Creative Director of Jushi Holdings Inc.

Coming to the cannabis point, I was actively looking for a partner to do a cannabis brand with The Queens of the Stone Age. I met Jushi through a very interesting coincidence. I was on the way to do a shoot in Silicon Valley with a guy called Les Claypool, who is from a famous band called Primus. I shot Les there and I was driving through Silicon Valley and remembered I had a friend nearby I should talk to. So, I called him and he was in Singapore. He called me right back (he never calls back normally) and said “You’ve got to talk to Jushi! You’ve got to talk to these guys Jim Cacioppo and Erich Mauff (two of the founders). They are starting something very exciting. They could be your partners.”

This is where the conversation started. It was my first time confronting a cannabis MSO and understanding how this works. I had just exited from my last agency and put together the best people from my previous endeavor to create a new sort of “creative collective” of UX and marketing experts. We did a test project for Jushi, a big research project on cannabis for California in retail, which was super interesting. It was a 200-page document – the first phase of user experience of the process before you build something – and through that I saw this as a big opportunity. I spoke to the founders again and came fully onboard in February 2020, just before the pandemic hit. From then on, it’s been a real amazing journey with me and the team. And it was the right moment to jump on the Jushi train as it was just about to leave the station.

Green: Can you talk about some of the geographies you are active in?

Neumann: Jushi is a multi-state operator. The most important state for Jushi is Pennsylvania. That’s where we have the most stores and we are building more stores there this year as well, very aggressively. We currently have 13 Beyond / Hello medical cannabis dispensaries in the state with many more to come, bringing an unmatched in-store experience, coupled with online reservations and in-store express pick-up.

The next important market for us is Virginia. We have a unique position there in Manassas with a cultivation facility and manufacturing and extraction facility, with the license for up to six stores. We started store number one in the facility, and we are rolling it out in HSA II. We are the only ones who can open stores in HSA II and this is straight on the border to Washington D.C. We call Virginia the “sleeping giant.” So much happened in the last year in Virginia around regulation and the industry, and now flower is finally legal.

Then we have Illinois – super interesting stores there. We have two flagship stores located straight on the border of Missouri, basically in East St. Louis. They are our biggest performers in the whole network because of the location. You have people coming over from Missouri, which is really in the beginnings of a medical market, and Illinois, which is now adult use. It was a super cool experience to see a medical market change to adult-use and be part of that change.

In other states, we recently announced the acquisition of Nature’s Remedy in Massachusetts, where we will have cultivation, processing and stores there. In Nevada, we have a grower-processor and we’re looking at opportunities in retail as well. At the moment, we have all our brands launched there. We are also continuing to build out our processing and cultivation capabilities in Ohio.

Last but not least is California. I’m based in California and the whole creative team is here. It’s a vanity market and it’s very competitive, but you’re in the capital of the world of cannabis in terms of brands and retail. California is in the future compared to the other states. So, we need to be here. It’s just like a soccer team. You must compete against good people or you’re not going to grow. So, that’s why competing here in California is key.

Green: How do you think about brand development, specifically in the cannabis CPG space?

Neumann: California is the king of brands. There are more products than brands in the cannabis industry at the moment. The products may have nice packaging, but brands aren’t really out there yet. The only states where you have “brands” as I would call them are California, Colorado and Oregon. I think we are just about to get to the place where the first rush is over and people with more experience about brands come in and build on the story of the brand. The myths, the cult, the legend of that story is important, and I think this is just about to get started.

Our brands, The Bank and The Lab, have good stories. They have been around a long time. We acquired them from a company in Colorado and we rolled them out in Nevada with a total revamp of look and feel as well as story. The Bank is celebrating this kind of roaring 20s idea. We have a lot of images, from black and white prohibition-style photos to this black-gold, very high-end, adult use tailored brand.

Vaping products from The Lab brand in Colorado

The Lab is a solid vaping brand from Colorado, and one of the 8th best-selling vape brands of all time. We revamped The Lab image to “take the lab out of the lab.” So basically, take the hairnet and the lab coat out of the vibe and add a whole new energy, with symmetry and nature in a leading role.

Tasteology, which is one of our self-made, self-created brands, was all based on customer research. In Pennsylvania, we have thousands of people we can communicate with, and we can test our brands. So, we’ve done focus groups and testing to see what sticks, and the name Tasteology came out of a huge research project with hundreds of names.

The last brand comes back to your question “Where are the brands going?” I think our brand Sēchē is the first one of our own creation and has this total lifestyle feel. It’s fine grind flower which normally might make its way to extraction. We treat it well and then we sell the raw flower, as well as a pre-roll line. It’s this kind of a young, cost effective, very affordable pre-roll and pre-ground brand, which is fabulous. And Sēchē really gets a lot of traction – flies off the shelves in Pennsylvania. It is a great product.

So, this is now the first stage where brands are created, but I think overall, there’s not many brands yet. They have to find their stories and their real purpose, I think. But California is ahead of it. And there’s some of them coming out now. So, I think there’s a new wave coming. It always goes in phases.

Green: How do you think about brand partners?

Neumann: We did the first step towards outside partnerships recently. We just partnered with Colin Hanks, Tom Hanks’ son, on his handkerchief line called Hanks Kerchiefs and we’re going to sell these in our stores. Hanks Kerchiefs has nothing to do with cannabis, but it takes our stores to a place where it’s not only cannabis products, it’s more the retail scene, the lifestyle scene. If we go into future partnerships with people, we would partner with big talent agencies to create something special. Maybe it’s limited editions, maybe it’s something more story-driven, but it doesn’t have to be there forever. I see using outside partnerships for more “drops,” as we call it. But we will see. You cannot force these collaborations. They have to come at the right time and need to be real. That’s what people feel. If it’s real you can feel it.

Green: Do you notice any differences in consumer preferences between the states you’re in and do you have to tailor your messaging differently?

Neumann: This is a super interesting question. I’ve been working in Europe, and you have all these different countries, so every market is different. Every market gets different messages. Every market gets different commercials. It’s the same in cannabis in the United States! The only difference is that it’s so regulated. I could launch a gummy in Virginia and all Virginia would know about it. It would become a household name, and everybody uses that gummy. But in California, no one will hear about it. No one would care about it. And the same vice versa, right?

So, different states, different brands. With our acquisitions, we are acquiring new brands, which then live only in those states. Then we have to support that. If the data would show we should then we do it. When we acquire something we consumer test in many states, and specifically in the states where the acquisition happened.

Overall, you can say flower is always what people want. But in markets like Virginia, we cannot sell flower at the moment. In Pennsylvania you have flower, but you can’t have edibles. Do Pennsylvanians want edibles? Of course, they want it but it’s not allowed yet. So, there’s always this to consider.

Green: What are some of the forward-looking opportunities that you see to merge product with technology?

Neumann: It’s interesting that flower, the most old-fashioned thing you could have, is the biggest thing. If you get into it, it’s pure, you can smell it, you can trust it. Flower has its own charm.

The Beyond / Hello retail location in Scranton, PA

So, asking about merging technology and product is like asking what technology comes with drinking wine. There’s lots of stuff around it. I think in the end the technology will be more about how you can create a product which delivers high THC, fast and controlled. The technology that goes into making stuff like live resin has a big future, because not everybody can make it. It has a very complicated process of freezing the product within four hours after the harvest, and then cold extraction. So, I think technology there has a big impact and gets the experience of the consumption right.

In the consumer world, people have tried a lot of things with technology. For example, limiting doses and inserting flower into a device. There are people trying all kinds of stuff. Common sense is always the key. What do you want to use most? Do you want to have a pre-roll and just enjoy it? A long one when you have friends around? A short one if you’re alone walking a dog? I think you have to keep it simple. That’s the most difficult thing most of the time.

Green: Final question here. What are you most interested in learning about? This can be personal life or cannabis.

Neumann: When I entered the cannabis industry, I hadn’t been a consumer since I was 18. I was more of an alcohol guy, but then later I stopped drinking alcohol, so I was totally clean the last 15 years until I entered the cannabis industry.

When I do something like making films about a jet fighter, I have to fly the jet fighter. If I make a film about jumping out of a plane, I have to jump out of the plane. So, if I work in the cannabis company, I have to consume cannabis. I cannot not consume it. So, I started professionally consuming cannabis every day. From day one when we started research, every day I tried other products and I became a real user. Not during the day, but in the evening when it’s the right time.

First of all, I compare it a lot with music. It’s like a feeling. Everybody feels it differently. I think what it does – and this fascinates me about it and it’s why I love to be in this industry – is it seems to be slowing down the world a little bit and your desperation. This slowing down of desperation actually opens you up to receive and when and you receive good stuff it comes to you kind of effortlessly. Not only is it great for medical use – it has helped me for pain as well – but also as a receiver of energy. I think it clears a lot of the “signal.” I’m always interested in learning more about this incredible plant.

Green: Thanks Dre, that concludes the interview.

Neumann: Thanks Aaron.

Soapbox

Can Cannabis Avoid Alcohol’s 3-Tier Distribution System?

By Rick Kiley
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As an experiential marketer that works with a lot of vice-oriented brands, I’ve always been fascinated by the story of the rise of spirits in the US – a history marked by ingenuity in the face of heavy restrictions, clashing social norms, crime and political ideals. Since then, those same qualities have emerged in the story of cannabis and how, against all odds, it has recently begun to push its way into the mainstream. But on the path to legalization, cannabis can also learn a lot from the spirits industry about what not to do.

For example, when laws governing the spirits industry were written in the post-Prohibition 1930s, the federal government wanted to create an equitable landscape. So, they created a 3-tier system – manufacturers or importers must sell to wholesalers, wholesalers must then sell to retailers and retailers sell to us. They figured that keeping manufacturing interests separate from wholesale and retail interests would keep any large company from owning an entire supply chain, muscling out smaller competitors.

In theory, it’s not a bad idea. Imagine the consequences of massive companies like Diageo or AB InBev using their money to pay bars and liquor stores to only stock their brands and not competitors. Add on the Tied House Laws, which basically says an entity in one of the three categories cannot have an ownership stake in any of the others, and you get a seemingly even-handed marketplace.

Tied House Laws theoretically limit one entity from monopolizing a supply chain

In truth, it makes it almost impossible to be disruptive or for new brands to break through. Other industries have innovated by cutting out the middleman and selling direct-to-consumer – something that simply cannot happen in alcohol (minus the wineries and distilleries that can sell direct out of their tasting rooms). Also, now distributors are so consolidated that there are only one or two big distribution companies in each state. So, as a company trying to bring a new product to market, you have to get into one of these highly selective and competitive distributors if you are going to be successful – a challenging ask for a small, independent brand.

Protection racket

Now, imagine that same challenge coming to the cannabis space. With legalization around the corner, the adult use (as opposed to medical use) cannabis industry could easily look like alcohol in the rules that will be set up.

The demand for high quality cannabis continues to increase, but the prices need to level out to stave off the black market.

Right now, adult use manufacturers can sell their products to dispensaries directly. Some use a distributor, but there is no nationwide mandate to – which is probably for the best. If a distributor isn’t a requirement, it forces brands to offer something new to differentiate themselves. It will spark innovation, rather than add an extra profit margin that will get rolled into the final price – a price that is already higher than it should be due to the murky federal legal status. Adding complexity and cost will only make it harder to compete with the illicit market. For the industry to grow, costs for illicit cannabis can’t be lower than its legal counterpart.

Of course, we are in the nascent stages of legalization here and we’ve come a long way culturally and technologically since the 30s. But remember, the rules governing alcohol were written nearly 100 years ago along with the passage of the 21st amendment repealing prohibition. Startlingly, those laws haven’t changed that much since they were written, so any mistakes made now in dealing with the cannabis industry could last for a long time.

A new way forward

What the cannabis industry needs is a new model for the adult use/recreational space, keeping some of what exists in the alcohol industry but without ever mandating use of a distributor – the middle tier. This would mean keeping Tied House Laws in place and applying them to cannabis so that a manufacturer could never hold an interest in a retailer, while still allowing them to sell directly to dispensaries and to consumers. Currently, some states allow for vertical integration, which would change under Tied House Laws.

This should be pretty simple, since most states are already separating licenses by type of activity (manufacturer, retailer, etc.) and it would promote competition while bringing the widest array of products possible to each consumer. Also, it would prevent any behemoths from squeezing out the up and comers.

extraction equipment
Constant innovation is a hallmark of the cannabis market and a key factor in continuous growth.

Of course, some retail license allowances could be considered on a case-by-case basis. For example, I would carve out an exception that growers/manufacturers could sell direct to consumers through a single “tasting room” at their brand home. This is similar to the operations of microbreweries, distilleries and wineries. It would encourage education for consumers, and provide great opportunities for brands to show why their products are better or unique.

Given the technology and logistics solutions available to businesses in a 21st century economy, mandated distributors create a sometimes-unnecessary barrier to an already efficient supply chain. If mandated, prices will inflate to cover added margin, thus making it harder to bring consumers over from the legacy market to the legal one. I’m not against the idea of a distributor – they can add tremendous value, but the mandate would seriously curtail industry growth.

Direct-to-retail and direct-to-consumer sales are necessary for the economic health and growth of the industry. Without this, using alcohol as a cautionary tale, at some point the middle tier cannabis brands will inevitably begin to wield an outsized amount of power. We are living at a time where innovation is going to be the key to explosive growth in the cannabis industry, so it’s important to do everything possible to let the market find its way without falling into a century-old trap.

Leaders in Cannabis Testing – Part 1: A Q&A with Milan Patel, CEO and Co-Founder of PathogenDx

By Aaron Green
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In this “Leaders in Cannabis Testing” series of articles, Green interviews cannabis testing laboratories and technology providers that are bringing unique perspectives to the industry. Particular attention is focused on how these businesses integrate innovative practices and technologies to navigate a rapidly changing landscape of regulatory constraints and B2B demand.

PathogenDx is an Arizona-based provider of microbial testing technologies. Since their inception in 2014, they have broadened their reach to 26 states in the US. In addition to cannabis product testing, PathogenDx also provides technologies for food safety testing, environmental testing and recently started offering human diagnostics testing to support COVID-19 response efforts.

We interviewed Milan Patel, CEO and co-founder of PathogenDx. Milan founded PathogenDx as a spin-off from one of his investments in a clinical diagnostics company testing for genetic markers in transplant organs. Prior to PathogenDx, Milan worked in finance and marketing at Intel and later served as CFO at Acentia (now Maximus Federal).

Aaron Green: What’s the history of PathogenDx?

Milan Patel: PathogenDx was effectively a spin-off of a clinical diagnostics company that my partner Dr. Mike Hogan, the inventor of the technology, had founded when he was a professor at the University of Arizona, but previously at Baylor Medical College back in 2002. I had invested in the company back then and I had realized that his technology had a broad and wide sweeping impact for testing – not just for pathogens in cannabis specifically, but also for pathogens in food, agriculture, water and even human diagnostics. In the last 14 months, this became very personal for every single person on the planet having been impacted by SARS-CoV-2, the viral pathogen causing Covid-19. The genesis of the company was just this, that human health, food and agricultural supply, and the environment has and will continue to be targeted by bacterial, fungal and viral pathogens impacting the safety and health of each human on the planet.

We founded PathogenDx and we pivoted the company from its original human organ transplant genetics market scope into the bigger markets; we felt the original focus was too niche for a technology with this much potential. We licensed the technology, and we repurposed it into primarily cannabis. We felt that achieving commercial success and use in the hands of cannabis testing labs at the state level where cannabis was first regulated was the most logical next step. Ultimately, our goal was and is to move into markets that are approved at the federal regulatory side of the spectrum, and that is where we are now.

Green: What year was that?

Milan Patel, CEO and Co-Founder of PathogenDx
Photo credit: Michael Chansley

Patel: 2014.

Green: So, PathogenDx started in cannabis testing?

Patel: Yes, we started in cannabis testing. We now have over 100 labs that are using the technology. There is a specific need in cannabis when you’re looking at contamination or infection.

In the case of contamination on cannabis, you must look for bacterial and fungal organisms that make it unsafe, such as E. coli, or Salmonella or Aspergillus pathogens. We’re familiar with recent issues like the romaine lettuce foodborne illness outbreaks at Chipotle. In the case of fungal organisms such as Aspergillus, if you smoke or consume contaminated cannabis, it could have a huge impact on your health. Cannabis regulators realized that to ensure public health and safety there was more than just one pathogen – there were half a dozen of these bugs, at a minimum, that could be harmful to you.

The beauty of our technology, using a Microarray is that we can do what is called a multiplex test, which means you’re able to test for all bacterial and fungal pathogens in a single test, as opposed to the old “Adam Smith” model, which tests each pathogen on a one-by-one basis. The traditional approach is costly, time consuming and cumbersome. Cannabis is such a high value crop and producers need to get the answer quickly. Our tests can give a result in six hours on the same day, as opposed to the two or three days that it takes for these other approved methods on the market.

Green: What is your business model? Is there equipment in addition to consumables?

Patel: Our business model is the classic razor blade model. What that means is we sell equipment as well as the consumables – the testing kits themselves.

The PathogenDx technology uses standard, off-the-shelf lab equipment that you can find anywhere. We didn’t want to make the equipment proprietary so that a lab has to buy a specific OEM branded product. They can use almost any equipment that’s available commercially. We wanted to make sure that labs are only paying a fraction of the cost to get our equipment, as opposed to using other vendors. Secondly, the platform is open-ended, meaning it’s highly flexible to work with the volumes that different cannabis labs see daily, from high to low.

One equipment set can process many different types of testing kits. There are kits for regulated testing required by states, as well as required environmental contamination.

Green: Do you provide any in-house or reference lab testing?

Patel: We do. We have a CLIA lab for clinical testing. We did this about a year ago when we started doing COVID testing.

We don’t do any kind of in-house reference testing for cannabis, though we do use specific reference materials or standards from Emerald Scientific, for example, or from NCI. Our platform is all externally third-party reference lab tested whether it’s validated by our external cannabis lab customers or an independent lab. We want our customers to make sure that the actual test works in their own hands, in their own facility by their own people, as opposed to just shrugging our shoulders and saying, “hey, we’ve done it ourselves, believe us.” That’s the difference.

Green: Can you explain the difference between qPCR and endpoint PCR?

Patel: The difference between PathogenDx’s Microarray is it uses endpoint PCR versus qPCR (quantitative real time PCR). Effectively, our test doesn’t need to be enriched. Endpoint PCR delivers a higher level of accuracy, because when it goes to amplify that target DNA, whether it’s E. coli, Salmonella or Aspergillus pieces, it uses all the primer reagent to its endpoint. So, it amplifies every single piece of an E. Coli (for example) in that sample until the primer is fully consumed. In the case of qPCR, it basically reaches a threshold and then the reaction stops. That’s the difference which results in a much greater level of accuracy. This provides almost 10 times greater sensitivity to identify the pathogen in that sample.

The second thing is that we have separated out how the amplified sample hybridizes to the probe. In the case of our assay, we have a microarray with a well in it and we printed the actual probe that has the sequence of E. coli in there, now driving 100% specificity. Whereas in the qPCR, the reaction is not only amplifying, but it’s also basically working with the probe. So, in that way, we have a higher level of efficiency in terms of specificity. You get a definite answer exactly in terms of the organism you’re looking for.

In terms of an analogy, let’s take a zip code for example which has the extra four digits at the end of it.  In the case of endpoint PCR, we have nine digits. We have our primer probes which represent the standard five digits of a zip code, and the physical location of the probe itself in the well which serves as the extra four digits of that zip code. The analyte must match both primary and secondary parts of the nine-digit zip code for it to lock in, like a key and a lock. And that’s the way our technology works in a nutshell.

Endpoint PCR is completely different. It drives higher levels of accuracy and specificity while reducing the turnaround time compared to qPCR – down to six hours from sample to result. In qPCR, you must enrich the sample for 24 to 48 hours, depending on bacteria or fungus, and then amplification and PCR analysis can be done in one to three hours. The accuracies and the turnaround times are the major differences between the endpoint PCR and qPCR.

Green: If I understand correctly, it’s a printed microarray in the well plate?

Patel: That’s correct. It’s a 96-well plate, and in each well, you’ve now printed all the probes for all targets in a single well. So, you’re not running more than one well per target, or per organism like you are for qPCR. You’re running just one well for all organisms. With our well plates, you’re consuming fewer wells and our patented foil-cover, you only use the wells you need. The unused wells in the well plate can be used in future tests, saving on costs and labor.

Green: Do you have any other differentiating IP?

The PathogenDx Microarray

Patel: The multiplex is the core IP. The way we process the raw sample, whether it’s flower or non-flower, without the need for enrichment is another part of the core IP. We do triplicate probes in each well for E. Coli, triplicate probes for Salmonella, etc., so there are three probes per targeted organism in each of the wells. We’re triple checking that you’re definitively identifying that bug at the end of the day. This is the cornerstone of our technology.

We were just approved by the State of New York, and the New York Department of Health has 13 different organisms for testing on cannabis. Think about it: one of the most rigorous testing requirements at a state level – maybe even at a federal level – and we just got approved for that. If you had to do 13 organisms separately, whether it’s plate culture or qPCR, it would become super expensive and very difficult. It would break the very backs of every testing lab to do that. That’s where the multiplexing becomes tremendously valuable because what you’re doing is leveraging the ability to do everything as a single test and single reaction.

Green: You mentioned New York. What other geographies are you active in?

Patel: We’re active in 26 different states including the major cannabis players: Florida, Nevada, California, Arizona, Michigan, New York, Oklahoma, Colorado and Washington – and we’re also in Canada. We’re currently working to enter other markets, but it all comes down to navigating the regulatory process and getting approval.

We’re not active currently in other international markets yet. We’re currently going through the AOAC approval process for our technology and I’m happy to say that we’re close to getting that in the next couple of months. Beyond that, I think we’ll scale more internationally.

I am delighted to say that we also got FDA EUA federal level authorization of our technology which drives significant credibility and confidence for the use of the technology. About a year ago, we made a conscious choice to make this technology federally acceptable by going into the COVID testing market. We got the FDA EUA back on April 20, ironically. That vote of confidence by the FDA means that our technology is capable of human testing. That has helped to create some runway in terms of getting federalized with both the FDA and the USDA, and certification by AOAC for our different tests.

Green: Was that COVID-19 EUA for clinical diagnostics or surveillance?

Patel: It was for clinical diagnostics, so it’s an actual human diagnostic test.

Green: Last couple of questions here. Once you find something as a cannabis operator, whether its bacteria or fungus, what can you do?

Patel: There are many services that are tied into our ecosystem. For example, we work with Willow Industries, who does remediation.

There’s been a lot of criticism around DNA based technology. It doesn’t matter if it’s qPCR or endpoint PCR. They say, “well, you’re also including dead organisms, dead DNA.” We do have a component of separating live versus dead DNA with a biomechanical process, using an enzyme that we’ve created, and it’s available commercially. Labs can test for whether a pathogen is living or dead and, in many cases, when they find it, they can partner with remediation companies to help address the issue at the grower level.

Another product we offer is an EnviroX test, which is an environmental test of air and surfaces. These have 50 pathogens in a single well. Think about this: these are all the bad actors that typically grow where soil is – the human pathogens, plant pathogens, powdery mildew, Botrytis, Fusarium – these are very problematic for the thousands of growers out there. The idea is to help them with screening technology before samples are pulled off the canopy and go to a regulated lab. We can help the growers isolate where that contamination is in that facility, then the remediation companies can come in, and help them save their crop and avoid economic losses.

Green: What are you most interested in learning about?

Patel: I would prefer that the cannabis industry not go through the same mistakes other industries have gone through. Cannabis started as a cottage industry. It’s obviously doubled every year, and as it gets scaled, the big corporations come in. Sophistication, standards, maturity all help in legitimacy of a business and image of an industry. At the end of the day, we have an opportunity to learn from other industries to really leapfrog and not have to go through the same mistakes. That’s one of the things that’s important to me. I’m very passionate about it.

One thing that I’ll leave you with is this: we’re dealing with more bugs in cannabis than the food industry. The food industry is only dealing with two to four bugs and look at the number of recalls they are navigating – and this is a multi-billion-dollar industry. Cannabis is still a fraction of that and we’re dealing with more bugs. We want to look ahead and avoid these recalls. How do you avoid some of the challenges around antimicrobial resistance and antibiotic resistance? We don’t want to be going down that road if we can avoid it and that’s sort of a personal mission for myself and the company.

Cannabis itself is so powerful, both medicinally as well as recreationally, and it can be beneficial for both consumers and industry image if we do the right things, and avoid future disasters, like the vaping crisis we went through 18 months ago because of bad GMPs. We must learn from those industries. We’re trying to make it better for the right reasons and that’s what’s important to me.

Green: Okay, great. That concludes the interview. Thank you, Milan.

Patel: Thank you for allowing me to share my thoughts and your time, Aaron.

Pesticide Remediation by CPC

By Arpad Konczol, PhD
2 Comments

Like any other natural product, the biomass of legal cannabis can be contaminated by several toxic agents such as heavy metals, organic solvents, microbes and pesticides, which significantly influence the safety of the end products.

Let’s just consider the toxicological effects. Since cannabis products are not only administered in edible forms but also smoked and inhaled, unlike most agricultural products, pesticide residue poses an unpredictable risk to consumers. One example is the potential role of myclobutanil in the vape crisis.

Unfortunately, federal and state laws are still conflicted on cannabis-related pesticides. Currently, only ten pesticide products have been registered specifically for hemp by the U.S. Environmental Protection Agency. So, the question arises what has to be done with all pf the high-value, but also contaminated cannabis, keeping in mind that during the extraction processes, not only the phytocannabinoids get concentrated but the pesticides as well, reaching concentrations up to tens or hundreds of parts per million!

Currently, there are three different sets of rules in place in the regulatory areas of Oregon, California and Canada. These regulations detail which pesticides need to be monitored and remediated if a certain limit for each is reached. Because the most extensive and strict regulations are found in Canada, RotaChrom used its regulations as reference in their case study.

Centrifugal Partition Chromatographic (CPC) system

To illustrate that reality sometimes goes beyond our imagination, we evaluated the testing results of a THC distillate sample of one of our clients. This sample contained 9 (!) pesticides, of which six levels exceeded the corresponding action limits. The most frightening, however, regarding this sample, is that it contained a huge amount of carbofuran, a category I substance. It is better not to think of the potential toxicological hazard of this material…

The CPC-based purification of CBD is a well-known and straightforward methodology. As the elution profile on the CPC chromatogram of a distillate shows, major and minor cannabinoids can be easily separated from CBD. At RotaChrom, this method has been implemented at industrial-scale in a cost effective and high throughput fashion. In any case, the question arises: where are the pesticides on this chromatogram? To answer this, we set ourselves the goal to fully characterize the pesticide removing capability of our methodologies.

Our results on this topic received an award at the prestigious PREP Conference in 2019. The ease of pesticides removal depends on the desired Compound of Interest.

Here is a quick recap on key functionalities of the partition chromatography.

  • Separation occurs between two immiscible liquid phases.
  • The stationary phase is immobilized inside the rotor by a strong centrifugal force.
  • The mobile phase containing the sample to be purified is fed under pressure into the rotor and pumped through the stationary phase in the form of tiny droplets (percolation).
  • The chromatographic column in CPC is the rotor: cells interconnected in a series of ducts attached to a large rotor
  • Simple mechanism: difference in partition

Let’s get into the chemistry a bit:

The partition coefficient is the ratio of concentrations of a compound in a mixture of two immiscible solvents at equilibrium. This ratio is therefore a comparison of the solubilities of the solute in these two liquid phases.

The CPC chromatogram demonstrates the separation of Compounds of Interest based on their unique partition coefficients achieved through a centrifugal partition chromatography system.

CPC can be effectively used for pesticide removal. About 78% of the pesticides around CBD are very easy to remove, which you can see here:

In this illustration, pesticides are in ascending order of Kd from left to right. CBD, marked with blue, elutes in the middle of the chromatogram. The chart illustrates that most polar and most apolar pesticides were easily removed beside CBD. However, some compounds were in coelution with CBD (denoted as “problematic”), and some compounds showed irregular Kd-retention behavior (denoted as “outliers”).

If pesticides need to be removed as part of THC purification, then the pesticides that were problematic around CBD would be easier to remove and some of the easy ones would become problematic.

To simulate real-world production scenarios, an overloading study with CBD was performed, which you can see in the graph:

It is easy to see on the chromatogram that due to the increased concentration injected onto the rotor, the peak of CBD became fronting and the apparent retention shifted to the right. This means that pesticides with higher retention than CBD are more prone to coelution if extreme loading is applied.

To be able to eliminate problematic pesticides without changing the components of the solvent system, which is a typical industrial scenario, the so-called “sweet spot approach” was tested. The general rule of thumb for this approach is that the highest resolution of a given CPC system can be exploited if the Kd value of the target compounds fall in the range of 0.5-2.0. In our case, to get appropriate Kd values for problematic pesticides, the volume ratio of methanol and water was fine-tuned. Ascending mode was used instead of descending mode. For the polar subset of problematic pesticides, this simple modification resulted in an elution profile with significantly improved resolution, however, some coelution still remained.

In the case of apolar pesticides, the less polar solvent system with decreased water content in ascending mode provided satisfactory separation.

Moreover, if we focus on this subset in the three relevant regulatory areas, the outcome is even more favorable. For example, myclobutanil and bifenazate, dominant in all of the three regulatory regions, are fully removable in only one run of the CPC platform.

Based on these results, a generic strategy was created. The workflow starts with a reliable and precise pesticide contamination profile of the cannabis sample, then, if it does not appear to indicate problematic impurity, the material can be purified by the baseline method. However, if coeluting pesticides are present in the input sample, there are two options. First, adjusting the fraction collection of the critical pesticide can be eliminated, however the yield will be compromised in this case. Alternatively, by fine-tuning the solvent system, a second or even a third run of the CPC can solve the problem ultimately. Let me add here, that a third approach, i.e., switching to another solvent system to gain selectivity for problematic pesticides is also feasible in some cases.

In review, RotaChrom has conducted extensive research to analyze the list of pesticides according to the most stringent Canadian requirements. We have found that pesticides can be separated from CBD by utilizing our CPC platform. Most of these pesticides are relatively easy to remove, but RotaChrom has an efficient solution for the problematic pesticides. The methods used at RotaChrom can be easily extended to other input materials and target compounds (e.g., THC, CBG).