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Hardware Platforms in Cannabis: A Q&A with Mike McDonald, President and CEO of Ammonite

By Aaron Green
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More and more we are seeing the development of proprietary hardware platforms in cannabis. With proprietary technology in hand, manufacturers often lean on MSOs, LPs and other brand partners to grow their business through existing sales channels.

We spoke with Mike McDonald, President and CEO at Ammonite, to learn more about the history of the Dablicator™ platform and Ammonite’s North American brand partner strategy. Mike formed Ammonite as a spin-off company from Jetty Extracts after getting to know the founders in a real estate transaction. Prior to Ammonite, Mike was an operator in the manufacturing and product development space, having helped to launch the Giant bicycle brand as well as growing and eventually selling the Atlas Snowshoe Company to K2 Sports.

Aaron: How did you get involved in cannabis?

Mike: Well, like a lot of folks in the industry, my background is pretty eclectic. I come primarily from an operator’s perspective – I’ve been in manufacturing, product development and company growth for my whole career. I lived in Taiwan for several years and helped to launch the Giant bicycle brand worldwide. I was also involved with a ski business that was started at Stanford as a thesis project called Atlas Snowshoe Company. Fast-forward, we built it into the largest snowshoe brand and activity in the US and later sold it to K2 Sports. So, I’ve always been involved in the growth of product-related businesses.

Mike McDonald, President and CEO at Ammonite

I’ve also done some real estate development as well; I actually sold our building to the Jetty guys, which is how we met. In that process, I got involved with their company, helped Jetty reorganize its business model, raise some money, and then just got addicted to the whole industry and really found it fascinating. I liked the team at Jetty and couldn’t resist jumping in, and now I’ve been full-time in the business for over three years.

Aaron: How did you get involved in Ammonite?

Mike: Ammonite is actually a spin out company from Jetty Extracts, which is one of the largest brands in California. Our main Ammonite product is called the Dablicator™ Oil Applicator, which was originally invented at Jetty as a medical device for cancer patients. We saw a big demand for it as a private label partnership product, so we decided to spin out a separate hardware company and really focus on developing unique IP and CBD and cannabis related hardware.

Aaron: What trends are you following in the industry?

Mike: Certainly the MSOs of the world are really expanding and the top three to five are making a mark with growth and more sophistication in the market. I think the social equity movement is really a big component that we’re all excited about in the industry. You’re seeing the larger players really put their money where their mouth is around that. We’ve always been a big part of that in California.

Specifically, regarding trends in the cannabis space, Colorado and California are probably the two most mature markets. We generally say what’s happening in California and Colorado eventually make their way out to the rest of the world. Vaping was invented in California and Colorado, and now it’s a huge part of the business where before, four or five years ago, the market was mostly flower-centric.

There’s a trend away from inhalables, with more awareness around lung-related illnesses and of course COVID, so we’re seeing a big growth in edibles, drinks and so forth. Interestingly enough, although it’s an inhalable, infused pre-rolls are a big growth sector as well. Jetty is actually launching an infused pre-roll program in February.

Folks are looking for ways to get their medicine without smoking – and this has definitely led to a growth in the oil application business. Oil application has traditionally been delivered via a syringe. Dablicator™ oil applicator is essentially an improved, more convenient syringe. On the medical side, patients have been taking oil sublingually, putting it in food and drink and so forth for years because a lot of them can’t smoke. As that trend transfers over to the adult use market, oil application is becoming really big. You can take it sublingually; you can put it in your food or beverage. On the recreational side, you can add it to your loose flower or joints, or of course, dab it directly onto your rig via the heat resistant tip.

Further, you’re probably familiar with a lot of these portable dab rigs that are taking off, like the G Pen Roam and the Puffco Peak and a variety of others. So now you can dab on the go with your standard wax and shatter in a jar. It’s just not the most convenient way if you’re up on a hike or on a mountain bike ride. So now, with a portable dab rig and something like the Dablicator™ oil applicator, you can have a really convenient mess-free way to enjoy cannabis. The big growth in concentrates and areas that aren’t necessarily inhalables is where our product hardware really fits in.

Aaron: How did you come up with the idea for the Dablicator?

Mike: The Jetty team had a friend that had brain cancer. He was doing a lot of chemotherapy and was having trouble eating and keeping weight on and he couldn’t smoke. So, the guys at Jetty began to bring him cannabis oil, which he was able to use ingesting it from a spoon initially and it really helped him with his pain, his anxiety and his appetite. In that process, we realized that there wasn’t really a great way to deliver oil. Syringes were there, but they were kind of sketchy and they weren’t convenient.

So, the Jetty team developed a better mousetrap. Several iterations later, this Dablicator™ product was ready for patients. In fact, it became a big part of the Jetty Shelter Project, a non-profit where the team delivers cannabis to cancer patients, and it was a very much sought-after product delivery device in that world. So, it was developed inside of a need on the medical side and it’s really sort of grown inside the expansion on the adult-use side.

Aaron: Can you explain how the Dablicator™ oil applicator works from a perspective of form and function?

Mike: Pre-Dablicator™ you would use a syringe type product – for direct oil application, sublingual application, or as an add on to your flower. The difference between Dablicator™ oil applicator and a traditional syringe is that Dablicator™ is a twist and plunge product. Imagine a pen filled with oil, but instead of inhaling it, you’re able to dispense it through a tip that is heat resistant, which means you can apply directly to your dab rig nail. You’re able to put it in your pocket without fear of cannabis oil leakage. It’s discreet, precise, compact and portable.

Aaron: How does the user dose using Dablicator™ oil applicator?

Mike: Basically, there’s measurements on the plunger of 55 milligrams apiece – one click is 55 milligrams, and you can dispense as many clicks as you like. What’s cool about the product itself is if you’ve clicked too many times accidentally, you can back it off and the excess oil won’t dispense. You can go to dablicator.com and see demo videos as well.

Aaron: Dablicator™ oil applicator started as a Jetty Extracts spin-off. I see you are now white labeling for other oil brands. How do you go about selecting your partners?

Mike: We call it our brand partner program. It’s not too dissimilar to what other hardware manufacturers, like PAX and GPen, are doing. We’ve got a patented and innovative device where our brand partners, MSOs and leading brands throughout the US and Canada, can take their existing vape and tincture oils and offer them in Dablicator™ oil applicator hardware.

Our focus is signing up major, well respected brands and MSOs on to the “platform,” meaning they are able to immediately offer between six and ten new SKUs to their consumers. They take their existing oils, put them into a custom branded Dablicator™ hardware unit and add their custom branded packaging. It’s a full turnkey solution. For example, one of our partners, 710 Labs, is developing their RSO and were shopping for a delivery method specifically geared towards medical patients. Within eight weeks, we had a custom program for them and delivered hardware, and we assisted on the packaging front as well.

Our partners have to be reputable folks that are interested in developing or delivering oil in a unique and innovative way. Frankly, our early partners are those that see where the growth is. 710 Labs is on the platform, as well as Surterra in Florida, Ancient Roots in Ohio, and we’ve got multiple conversations going to some of the other MOSs and the LPs in Canada.

Aaron: Are the brand partners loading the oil applicator themselves?

Mike: We customize the product for them and then ship them unassembled and empty. In their lab, they use the same machinery and equipment they use to fill their vape cartridges. They then fill their Dablicator™, assemble it, package it and ship it out just like any other product that they’re processing and manufacturing.

Aaron: What kind of oils are suitable for Dablicator™?

Mike: Pretty much any oil that’s going into a vape cart is suitable and then some. Some of our customers, including Jetty, started out with a THC distillate. Live resin is becoming a big product category in California as well as solventless oils. Dablicator™ oil applicator can accommodate everything from distillate to live resin to solventless to RSO and even full spectrum CBD. If it can flow, if it doesn’t crystallize up like shatter and sugars and diamonds, you can put it into Dablicator™, even the thickest of oils. It’s designed to contain any kind of liquids that are flammable.

Aaron: What geographies are you currently in?

Mike: We’re in multiple states throughout the US and actually just signed up with an LP in Canada. We only launched the program in August of 2020, and today we’ve got partners California, Colorado, Ohio, Arizona, Missouri, Florida, soon to be Michigan, Illinois, and throughout Canada.

Aaron: Any plans for international expansion beyond North America?

Mike: We’re getting inquiries on a regular basis from all over the place, including internationally. We’re in conversations with some folks down in Brazil. Spain is actually a big cannabis market and we’re having some conversations with some folks there. The inquiries are coming in faster than we can process the relationships, but right now our major focus is on North America.

Aaron: What are your goals with Ammonite?

Mike: We are developing a category, right? So today, oil dispensing isn’t top of mind. Today, if you want oil, you go into a dispensary and say, “Hey, give me those syringes.” My goal is that a year from now, you can walk into Harborside in Oakland and you see a wall of different branded Dablicator™ oil applicators. The goal is to really turn the oil dispensing business into a category, and then position Dablicator™ oil applicator as the best and leading product in that category.

Aaron: What are you personally interested in learning more about?

Mike: Well, I’ve got two teenagers – two daughters, as a matter of fact, a freshman and a senior – and they’re being homeschooled right now. So that’s been quite an interesting development!

I think on the cannabis side, it’s just fascinating what it is as a business model. It’s the most recent multi-billion-dollar opportunity in consumer products. You only get a chance to participate in something like that maybe once in a lifetime. I’m really looking forward to seeing it become more adopted into the mainstream and it’s already becoming that way from a consumer perspective. I am watching the cannabis market become legal from a federal perspective, hoping that the social equity component of the industry really stays with it.

I’ve been in a lot of businesses over the years; I feel like one of the gray hairs in this business that is actually an operator versus someone who came over from the financial side. I am continuing to learn, grow and work with great people and this has been a really amazing experience for me.

Aaron: Okay, great. Mike, that’s the end of the interview. Thank you for your time today!

Canadian Lab Offers Vapor/Smoke Analysis

By Cannabis Industry Journal Staff
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According to a press release sent out last week, Complex Biotech Discovery Ventures (CBDV) has expanded their testing capabilities considerably with the new addition of a vapor/smoke analyzer. CBDV is a licensed cannabis and psilocybin research laboratory embedded in the University of British Columbia, led by CEO Dr. Markus Roggen.

Dr. Markus Roggen, Founder of Complex Biotech Discovery Ventures (CBDV)

The ability to analyze vapor and smoke is a relatively novel concept for the cannabis space, but has been utilized by the tobacco industry for years now. In the early days of adult-use cannabis legalization in the United States, stringent testing regulations for contaminants like pesticides were adopted out of a fear for what would happen when consumers ingest toxic levels of contaminants.

One of the common refrains iterated throughout the industry over the past ten years was that there just wasn’t enough research on how different contaminants affect patients and consumers when burned and inhaled. We still don’t know too much about what happens when someone smokes a dangerous pesticide, such as myclobutanil. Beyond just contaminants, the new technology allows for companies to measure precise levels of cannabinoids in vapor and smoke, getting a more accurate reading on what cannabinoids are actually making it to the end user.

The smoke analyzer at CBDV

This new development coming from our neighbor to the north could lead to a breakthrough in the cannabis lab testing and research space. CBDV claims they can now analyze cannabis material with a much more in-depth analysis than basic compliance testing labs. The new technology for analysis of smoke, vapor, plant material and formulations allows companies to thoroughly understand their materials in each stage of the product formulation process, all the way to product consumption.

Beyond just smoke and vapor analysis CBDV also offers NMR spectroscopy, metabolomics, nanoparticle characterization, computational modeling and other testing services that go far beyond the traditional compliance testing gamut.

“Our new services offer comprehensive insights into plant material, extracts, end-products and even the smoke/vapor by using state-of-the-art analytical instruments,” says Dr. Roggen. “By understanding the chemical fingerprint of the material, cannabis producers can eliminate impurities, adjust potencies, and optimize extraction processes before wasting money and resources on producing inconsistent end products. As a chemist I am really excited about adding NMR and high-res mass spectroscopy to the cannabis testing offerings.”

Learning from the First Wave Part 1: How Law Shapes the California Cannabis Industry

By Todd Feldman
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As a cannabis lawyer, I spend a lot of time thinking about the ways that regulations affect a cannabis company’s bottom line. Since I’m in California, the ways are many.

In late 2017 I became the chief compliance officer for an Oakland startup that carried out delivery, distribution, cultivation and six manufacturing operations. A big part of my job was preparing my company, along with several equity cannabis companies, for California’s First Wave of cannabis licenses.

For the most part, First Wave licensees came from California’s essentially unregulated medical cannabis market, and/or from California’s by-definition unregulated “traditional” market. When California began issuing licenses in January 2018, many First Wavers were unprepared because their businesses practices had evolved in an unregulated market. A big part of my job was to help them adapt to the new requirements. As a result, I saw the regulations, and the effects of regulations, in sharp relief.

Regulation touches virtually every aspect of the legal cannabis industry in California. So anyone who wants to understand the industry should have at least a basic understanding of how the regs work. I’m writing this series to lay that out, in broad strokes.

Some key points:

  • The regulated market must be understood in relation to the previous unregulated (medical) market as well as the ongoing traditional market.
  • Regs define the supply chain.
  • Regs are designed to ensure product safety and maximize tax revenue.
  • Many regulations mandate good business practices.
  • Local enforcement of building, health and safety codes tends to be zealous and costly.

A Tale of Three Markets

California’s regulated cannabis market can only be understood in relation to the medical market that preceded it, and in relation to the traditional market (illegal market) that continues to compete with it.

The Before Times

California’s legal medical cannabis market goes back to 1996, when the Compassionate Use Act passed by ballot measure. One fact that shaped the medical market was that it was never just medical – while it served bona fide patients, it also served as a Trojan horse for adult-use (recreational) purchasers.

Another fact that shaped the medical market was a near complete lack of regulation. On the seller’s side, you had to be organized as a collective. On the buyer’s side, you had to have a medical card. That was it.

Meanwhile, the cannabis supply chain was entirely unregulated. This tended to minimize production costs. It also meant that a patient visiting a dispensary had no way of verifying where the products had been made, or how.

The Regulated Times

Licensing under the Medical and Adult-Use Cannabis Regulation and Safety Act (the “Act”) began on January 1, 2018. It was the beginning of legal adult-use cannabis in California. It was also the beginning of the Regulated Times, as the Act and accompanying 300-plus pages of regulations transformed the legal cannabis market.

 For example:

  • The Act defines the cannabis supply chain (as a series of licensees).
  • Across the supply chain, the internal procedures of cannabis companies are subject to review by state agencies;
  • Cultivators and manufacturers cannot sell directly to a dispensary – they must go through a distributor;
  • All cannabis must be tested for potency and a long list of contaminants by a licensed testing laboratory before it may be sold to consumers;
  • And beginning in 2019, all licensees were required to participate in the California Cannabis Track and Trace (CCTT) program, which is designed to track all cannabis from seed to sale.

Just as importantly, the Act establishes a dual licensing system – that is to say, in order to operate, a cannabis company needs a local permit (or other authorization) as well as a state license. In fact, local authorization is a prerequisite for a state license. And your local jurisdiction will have its own rules for cannabis that apply in addition to the state rules, up to and including a ban on cannabis activities.

Needless to say, operating in the Regulated Times is a lot more complicated and expensive than it was during the Before Times.

Especially when you consider the taxes. For example, in the City of Los Angeles, sale of adult-use cannabis is taxed at 10%, which means that any adult-use purchase in L.A. gets a 34.5% markup:

  • 15% state cannabis excise tax, plus
  • 10% Los Angeles Adult Use Cannabis Sales tax, plus
  • 5% sales tax.

Note that the distributors must collect the excise tax from the retailer, so the 15% markup is not necessarily visible to the consumer. Similarly, consumers are generally unaware that there is a cultivation tax of $9.65 per ounce (or about $1.21 per eighth) of dried flower that the distributor has to collect from the cultivator.

Theoretically, all of this might be unproblematic if licensed retailers were only competing with each other. Which brings us to:

The Traditional Market

The traditional market is the illegal market, which is to say, the untaxed and unregulated market.

Legalization of adult-use cannabis was supposed to destroy the traditional market, but it hasn’t. As of early 2020, the traditional market was estimated to be 80% of the total cannabis market in California. This is not surprising, since the traditional market has the advantages of being untaxed and unregulated.

The traditional market has a pervasive negative effect on the legal market. For example, the traditional market tends to depress prices in the legal market and tends to attract talent away from the legal market. Some of these effects will be discussed in the following articles.

This article is an opinion only and is not intended to be legal advice.

CA Health and Safety Warning Laws Have Changed: Are You In Compliance?

By Megan Caldwell, Lindy Martinez
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A new California Proposition 65 mandate took effect on January 3, requiring health warning labels for all cannabis products sold in the state. Failure to comply with the requirements can and will result in enforcement against cannabis producers and sellers, resulting in hefty penalties. Here’s what you need to know.

Some Background on Proposition 65 and Cannabis

California’s Proposition 65, also known as the “Safe Drinking Water and Toxic Enforcement Act of 1986,” requires various parties in the supply chain for consumer products to provide warnings on products they sell in the state if exposure to certain chemicals in those products will pose a significant risk of cancer or reproductive harm. Proposition 65 applies to any company that sells products in California, regardless of whether the business is headquartered or manufactures products in California.

This is an example of a Prop 65 warning label. They might look familiar because we tend to see them on a lot of common goods and products.

Cannabis (Marijuana) Smoke” was listed under Proposition 65 in 2009 because of the potential that it contains ingredients or emits chemicals known to cause cancer. These chemicals include toxins such as arsenic, benzene, cadmium, formaldehyde, lead and nickel. In January 2020, Delta-9-Tetrahydrocannabinol (THC) was added to the list of toxic chemicals under Proposition 65 because of THC’s potential to cause reproductive harm. Now, both THC and cannabis smoke are listed under Proposition 65 and require warning labels.

What This Means for You and Your Company

The updated chemical list, which includes THC, became effective January 3, 2021, so the clock to come into compliance is ticking if you are not already complying. Many cannabis companies selling in California already comply with Proposition 65 by including warnings on their products that emit cannabis smoke. However, now companies that have previously issued a consumer warning regarding cannabis smoke must expand their warnings to include both the potential risk of cancer and the potential risk of reproductive harm. Additionally, products that previously did not require a warning for cannabis smoke will now be subject to Proposition 65 for exposure to THC.

The listing of THC implicates a broader range of cannabis products because it affects any product that contains detectable levels of THC, including products that contain less than 0.3% THC in compliance with the 2018 Farm Bill. Under the THC listing, a wide range of cannabis and hemp-derived CBD products, including products that do not emit smoke, such as edibles, topicals and other concentrates are subject to the Proposition 65 labeling requirements.

The agency that oversees Proposition 65 has provided so-called “safe harbor” levels for many listed chemicals that allow companies to forego a warning label if exposure to the chemical occurs at or below a certain threshold. However, no safe harbor level has been established for cannabis smoke or THC, and so the burden falls to the business to determine if the levels of the chemical pose a significant risk to the consumer. This determination typically requires extensive and costly testing that is not practical for most businesses. Thus, parties in the cannabis supply chain should work to properly label all cannabis-related products at this time. Failure to do so is risky. Proposition 65 “bounty hunters” team up with individuals to enforce Proposition 65 by sending notice of violation letters and then often filing lawsuits against businesses they believe are in violation of the statute. Many of these demands and lawsuits settle, as the cost to litigate is expensive. Settling, though, can be expensive, too.

Integrating a Culture of Quality Into the Cannabis Industry

By David Vaillencourt
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The culture of the cannabis industry is filled with passion that many envy, and for valid reasons. The roots of the cannabis plant go back thousands of years. As of this writing, there are no documented human deaths that were caused by a phytocannabinoid overdose. However, it is not all rainbows and unicorns.

Before breaking ground, fundraising, proper facility design, competitive application and permitting requirements are just the start. Once operating, businesses struggle to stay current with regulations that continue to evolve. Cannabis cultivators struggle to scale while mitigating pest infestations, which is a part of life in the conventional agricultural industry. A lack of consistent products frustrates consumers, while regulators and policy makers continue to struggle on the best way to regulate a commodity that has seemingly endless demand. The reality is dizzying!

However, amidst all of the challenges and opportunities, a continually overlooked tool stands out: a Quality Management System (QMS). Merriam-Webster defines a system as “an organized set of doctrines, ideas, or principles usually intended to explain the arrangement or working of a systematic whole.”

A QMS documents processes, procedures and responsibilities that ultimately direct an organization’s activities to meet customer and regulatory requirements as well as continually improve its effectiveness and efficiency. In other words – it steers innovation through the collection of data while ensuring products are safe for the consumer. For further reading, the American Society for Quality (ASQ), now over 70 years old, is an excellent resource and provider of resources and formal training programs that are recognized and revered around the world.

Step 1: Define your stakeholder requirements

This all starts with knowing your stakeholder (e.g., customer, regulatory body) requirements. For simplicity’s sake, let’s start with your customer; at a fundamental level, they expect safe, consistent and reliable products that impart a certain experience.

How does that translate into specifications? Let’s look at them one at a time.

What does “safe” mean? For an edible, safe means the product is free of physical, chemical and microbial hazards. Knowing what potential impurities could be in your product requires understanding your raw materials (inputs) and the manufacturing process. To take a deeper dive, some of the aspects of safety and quality, product specifications and testing considerations are discussed in this recent Cannabis Industry Journal article by Dr. Roggen and Mr. Skrinskas here.

An example of a compliant label in Oregon

What does “consistent” mean? This builds off and complements the safety profile. It could mean a consistent fill level, an acceptable range of cannabinoid concentration, and so on. For example, in the US Pharmacopeia’s peer-reviewed article about quality attributes of cannabis inflorescence (commonly known as flower or bud), they recommend 20% as the acceptable variance in cannabinoid content. For a product labeled as having 25% THC, the product will actually test to between 20% and 30%. This may be surprising, and discomforting for some, but the reality is that products on the market consistently fail to meet label claims.

What does “reliable” mean? That could mean that you always have inventory of certain products on the shelves at your dispensary. Defining “always” as a SMART goal – perhaps it means that you will have your top 3 products in stock at least 90% of the time. Customers need to feel like they can rely on your business to provide them with the products they want. Take the time to capture the data on what your customers want and work to satisfy their needs and you’ll watch your business really accelerate.

Step 2: Build your processes to meet these expectations

This is where your written standard operating procedures (SOPs), forms and records come into play. Your SOPs serve to memorialize your operations for consistency. Most SOPs in the cannabis industry are not written by the actual operators of a process. Rather, they are written by the legal and compliance team without review by the operators to confirm that what they are stating reflects operational reality. The audience needs to be the operators. Without effective SOPs that are utilized by your employees, your business will struggle to meet the established specifications. Cannabis businesses in Colorado, the oldest regulated adult-use cannabis market in the United States, continue to see 1 in 8 of their products fail final product testing! Cannabis businesses that understand their processes, document them in SOPs and have records to prove they follow their SOPs (see Step 3) are able to reduce errors that ultimately lead to costly rework and product failures.

Consistency in quality standards requires meticulous SOPs

Step 3: Monitor and improve

You have your requirements, you have your process, but how do you know that they are being adhered to? By the time you have results from a third-party lab, it’s too late. Look internally. Records and logs that show preventive maintenance was performed, room and canopy temperature and humidity checks, inventory reports, production records, extraction equipment report and employee training records shouldn’t be filled out only to be filed away. These records are data, which is your most valuable tool. Unfortunately, records are one of the most overlooked assets in today’s cannabis business. A team independent from operations (typically a Quality Unit) should be regularly reviewing these for inconsistencies and trends that can alert you to catastrophic failures before they occur.

Initially, the additional expenditure and learning curve may make this seem like an added burden, but keep in mind that succeeding in today’s cannabis industry requires long-term customer retention. By biting off one piece at a time, you can slowly implement a QMS that will improve your business, increase customer satisfaction, and ensure your brand is a staple for years to come. Remember, quality and compliance is a journey, not a “set it and forget it” situation.

The definition of a Quality Management System includes ‘continuous improvement’. Look forward to a future article which will discuss the importance of tools like a CAPA Program – Corrective Action Preventive Action (which all cannabis license holders in Colorado are required to have in place as of January 1, 2021) and how they complete your QMS, keeping you compliant and mitigating your business risks!

Due Diligence for Suppliers & Cannabis Supply Chain Partners

By Mark Slaugh
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Between the patchwork quilt of rules and regulations that is the modern cannabis industry, products pass through many hands before being sold to a customer. From sourcing, cultivating, manufacturing, distributing and vending, the relationships between a licensee and their vendors/partners up and down the supply chain is complex and touches many stakeholders along the way.

While the focus on quality packaging, dope labeling, delicious ingredients and consistently potent cannabis is a priority for most companies, what often isn’t thought about is the liability in bringing these components together in terms of compliance.

Compliance responsibility falls on licensees as a direct term and condition of licensure within their state. To operate, licensees must maintain and be able to demonstrate compliance with a plethora of rules and regulations. Compliance is the name of the game in cannabis.

While most operators understand this, what most do not think about is how the compliance or noncompliance of their vendors affects their own liability.

Sharing Noncompliance & Liability

Supply chain partners are automatically segregated by whether or not they are plant touching licensees or not.

Licensees are the only entities in the supply chain that can be fined, administratively held, suspended, revoked or even arrested due to noncompliance. This fundamental nature means that supply chain partners are automatically segregated by whether or not they are plant touching licensees or not.

In the case of mutual licensees such as a manufacturer and dispensary, the liability for compliance falls on both entities. A single manufacturer that makes an error on labeling language or a cultivator using the incorrect containers both pass on their liability to any downstream partners.

iComply has seen regulators quarantine hundreds of products among multiple dispensaries who never checked the compliance of the supplying manufacturer. Surprisingly, most dispensaries don’t think of the liability passed to them amid hundreds of SKUs and multiple manufacturers and cultivators. Confounding the issue further is that everyone in the industry can interpret the same rules in completely different ways.

Assuming your supply chain partners are 100% compliant is a dangerous pitfall.

By not checking noncompliance from supply chain partners, operators accumulate evidence dating back years. Like METRC being off, these issues tend to snowball until they seem overwhelmingly difficult to handle. And it doesn’t just stop at labeling issues. Noncompliance can fall on all supply chain partners and be left in the hands of a licensee in a variety of ways.

Business partners like security contractors can often run afoul of regulations and put their licensed partners at risk.

Even worse, are supply chain partners who don’t have a motive to be compliant as they do not own licenses and often have a poor understanding of cannabis compliance. A packaging provider, marketing company, CBD provider, security company, vending machine providers, waste disposal companies and other commonplace suppliers and partners can often run afoul of regulations and put their licensed partners at risk.

Since regulators can only enforce the licensed entity, many states have made it clear that licensees are ultimately and fully responsible for any actions of noncompliance taken by third parties contracted by the company – regardless if they touch cannabis or not.

Areas of Common Noncompliance in Cannabis

Like a game of “Hot Potato” (worth millions of dollars), we’ve seen common noncompliance liability get passed down the supply chain in the following areas of cannabis operations:

  • Product liability
  • Packaging and labeling
  • Test result manipulation
  • Expired licenses
  • Input or ingredient defects
  • Inventory tracking errors
  • Recordkeeping and manifest errors

Some of these areas of noncompliance rely with non-licensed supply chain partners such as packaging, ingredients or third party printed labels. Often, these folks simply don’t know what they don’t know and make mistakes – not knowing the thousands of dollars they could be costing their licensed partner down the line.

Other areas in which compliance should be expected from licensed partners lies in product liability, test result issues, inventory tracking, manifests and recordkeeping. No one usually wants to be out of compliance and usually these issues arise from licensed partners who are simply confused, mistaken or ignorant to the requirements of ongoing and changing rules.

It’s hard to keep all of one’s suppliers and supply chain partners on the same page over the long run and amid a multitude of changing rules. But what you resist, persists…

Managing Compliance in the Cannabis Supply Chain

Nothing worth it is ever easy; but it is possible to identify common areas of noncompliance in one’s cannabis operation and supply chain partners and to do something about.

To identify problem areas, iComply recommends conducting regular auditing at a macro level; but to also dive deeper into micro level audits of all of one’s books and records (covering vendor files) and packaging and labeling for at least 12 months.

You don’t know what you don’t know, so one must begin by investigating and understanding where liabilities are occurring between themselves and their supply chain partners. Once valid feedback and noncompliance is discovered, it can be remediated.

Like triage, you have to stop the bleeding before you can prevent further injury.

Consistency in quality standards requires meticulous SOPs

It is always more expensive and time consuming to continue reacting to noncompliance and trying to fix issues after the fact. This is how snowball effects happen until the problems seem so overwhelming, operators tend to simply ignore the liability. While it is human nature, it is also extremely dangerous and detrimental when multimillion dollar licenses are on the line.

An ounce of prevention is worth a pound of cure –Benjamin Franklin

By implementing proactive compliance measures, cannabis businesses can avoid costly noncompliance consequences and position themselves as proactive checkpoints of supply chain compliance. We recommend integrating the following procedures, documents, training and tools into one’s operational compliance infrastructure:

  • New vendor checklist
  • Packaging and labeling checklists by product type
  • Virtual review of labels/non-cannabis packaging
  • Calendar expiration dates for licenses and products
  • Compliance auditing of key vendors and strong contracts regarding liability
  • Input product checklists and tracking as per GMP compliance

This snapshot is just the tip of the iceberg when it comes to the depths of liability a cannabis business is exposed to by its supply chain partners. To truly manage compliance, one must be aware of shared risk and implement proactive measures to prevent suppliers and supply chain partners from inadvertently affecting the operational compliance of your cannabis business.

Selecting Supply Chain Partners

There are plenty of fish in the sea and plenty of suppliers vying to do business with you. iComply has seen the good, the bad and the ugly. We’ve been on the front lines of developing markets like California where we warned our clients to steer clear of companies like Kushy Punch long before they finally lost their license for noncompliance.

control the room environment
Preventing contamination can save a business from extremely costly recalls.

We advise our clients on the importance of being selective and conducting due diligence in vetting supply chain partners and vendors. Most fundamentally, how aligned are the values of potential partners? Are they in the business for the same reasons you are? What brought them to the cannabis space? How do they value relationships and what do they know about compliance?

Too often when focused on price or speed, people miss the more important fundamentals of relationships. We serve as vetters for our clients whether they are shopping for a POS provider, a bank or a waste disposal company. Beyond the cultural alignment, the more objective questions begin to take shape in vetting a potential partner. This can differentiate between license holding and non-holding supply chain partners.

For plant-touching licensed partners, we recommend answering the following before entering into business partnerships that affect your supply chain:

  • Copies of licenses, contracts, and a catalogue of products
  • For products being selected, prior to ordering a sample, obtain a copy of the label by email first. Or an EMPTY sample of product packaging and labeling to vet against a packaging and labeling checklist.
  • Search news articles on the company and ask if they have had compliance issues before. Obtain documentation if there have been compliance issues previously.
  • Ask how they manage their compliance and prevent noncompliance down their supply chain. Do they train their staff? Do they conduct regular audits internally? How often do they update SOPs and reconcile inventory?

For non-plant touching partners, we recommend answering the following:

  • Obtain any certifications for quality assurance or in credentials for services.
  • Ask for references from other customers who have cannabis licenses.
  • Discover how familiar they are with the cannabis industry AND the rules and regulations in your market.
  • Ensure they have an understanding of how they impact your compliance. Discover how they plan on preventing areas of concern together.
  • Make sure they know you are ultimately responsible for noncompliance and understand what they are willing to do to protect you.

Ensuring accountability across the supply chain means selectively choosing partners who share the same values of integrity and professionalism. On more complicated deals, such as licensing IP or your brand to operators in new states or markets, we recommend that you mandate a compliance program that offers third-party validation to ensure the internal integrity of your partners. Too often, brand risk isn’t considered in the fast-paced expansion of the industry and operators must not only be vetted, but held accountable, when representing one’s brand and products.

For all intents and purposes, the wild web of the supply chain in cannabis is the industry. We are a collective of collaborators who all serve the goal of delivering high quality and safe products to cannabis consumers globally. For those committed to minimizing their risk to protect their profits, cannabis compliance is the key to success.

Ensuring accountability across the supply chain means selectively choosing partners who share the same values of integrity and professionalism. In doing so, the industry elevates its legitimacy and more effectively expands in a sustainable manner that protects all stakeholders involved.

Noncompliance affects licensees the most and they must be the most vigilant, but it takes a village to raise an industry. Compliance affects most everyone in the supply chain and the loss of any operator hurts the entire industry.

Updates in Employment Law: CA, WA & CO

By Conor Dale
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A number of laws have gone into effect in 2021 which may have a major impact on cannabis industry employers; clearly understanding the changing legal landscape is essential to avoid and limit potential liability in the new year and beyond. Below is a brief summary of some relevant new employment laws in cannabis friendly states:

California:

  • Expansion of family and medical leave: California has long required employers to provide job protected medical and family leave if an employee worked at a jobsite with 50 or more employees within a 75-mile radius.
  • Senate Bill 1383 now requires all employers with five or more employees to provide up to twelve weeks of unpaid, job-protected leave for employees to bond with a new child or to care for themselves or a family member suffering from a serious health condition. To be eligible for the leave, an employee must have at least 12 months of service with the employer and have performed at least 1,250 hours of work in the previous 12-month period. While on leave, employees are entitled to continue to participate in an employer’s health insurance plan and to return to their job or a comparable position at the conclusion of their job-protected leave. Previously exempt small employers should be aware of these obligations moving forward.
  • Employer Pay Reporting Requirements: Under Senate Bill 973, employers with 100 or more employees that are required to file an annual Employer Information Report, colloquially known as the EEO-1 report, must submit annual information on its employees’ pay data to the state’s Department of Fair Employment and Housing (DFEH). The report must include the number of the employer’s employees by race, ethnicity and sex in specific job categories and pay ranges and their associated work hours and earnings.
  • The first report is due on March 31, 2021, and the DFEH has prepared an online portal to assist employers in submitting this information. These reports can be complex and address highly sensitive information, so employers are strongly advised to contact counsel for assistance in preparing and submitting their first report.

Washington

  • Increased pay requirements: Washington’s inflation-based minimum wage system has increased the minimum wage to $13.69 per hour in 2021. Employers with 50 or fewer employees must also pay salaried employees at least $827 per week (or $43,004 per year) and employers with more than 50 employees must pay at least $965 per week (or $50,180 per year) starting January 1st.

Colorado

  • Equal Pay for Equal Work Act: Beginning in 2021, all employers with at least one employee must: (1) provide formal notice to Colorado employees of promotional opportunities; and (2) disclose pay rates or ranges in job postings that could be performed in Colorado (this includes virtual or remote work positions).
  • The Equal Pay for Equal Work Act generally requires employers to take reasonable efforts to promptly announce, post, or otherwise communicate all opportunities to all current employees prior to making a promotion decision. An employer must communicate promotional opportunities when it has or anticipates a vacancy or a new position that could be considered a promotion for current employees in light of pay, benefits, status, duties or further potential promotions.
  • Under the law, job postings must also include: (1) the rate of pay or pay range for the position; (2) a general description of bonuses, commissions or other forms of compensation offered with the job; and (3) a description of the employment benefits associated with the position.

Cannabis industry employers face a range of new laws, even absent the continued legal burden of managing employees during the COVID 19 pandemic. Employers should consider carefully reviewing all applicable laws and seeking guidance from counsel when needed.

Cresco Labs Acquires Bluma Wellness

By Cannabis Industry Journal Staff
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Cresco Labs, one of the largest multistate operators (MSOs) in the country, announced the acquisition of Bluma Wellness Inc., a vertically integrated cannabis company based in Florida.

Cresco Labs, with roots in Chicago, Illinois, operate 29 licenses in 6 states across the United States. With this new acquisition, Cresco Labs solidifies their ubiquitous brand presence in the most populous markets and cements their position in Florida, a new market for them.

According to the press release, the two companies entered an agreement where Cresco will buy all of Bluma’s issued and outstanding shares for an equity value of $213 million. They expect the transaction to be completed by the second quarter of this year.

Charles Bachtell, CEO of Cresco Labs, says their expansion strategy is based largely on population. “Our strategy at Cresco Labs is to build the most strategic geographic footprint possible and achieve material market positions in each of our states,” says Bachtell. “With Florida, we will have a meaningful presence in all 7 of the 10 most populated states in the country with cannabis programs – an incredibly strategic and valuable footprint by any definition. We recognize the importance of the Florida market and the importance of entering Florida in a thoughtful way – we identified Bluma as having the right tools and key advantages for growth.”

Bluma Wellness operates through its subsidiary, One Plant Florida, which has 7 dispensaries across the state and ranks second in sales in the state. They also have an impressive delivery arm of their retail business, deriving 15% of their revenue from it.

Q&A with Bruce Macdonald, Chairman of C21 Investments

By Aaron Green
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Multi-state operators (MSOs) are on the rise in the United States, navigating complex regulatory frameworks to drive profitability through economies of scale and scope. C21 Investments is a vertically integrated cannabis company with operations in Nevada and Oregon; traded on the Canadian Stock Exchange (CXXI) and on the OTCQX (CXXIF). The company recently secured a commitment from Wasatch Global Investors, JW Asset Management (Jason Wild/TerrAscend) and CB1 Capital Management (Todd Harrison) who, in addition to C21’s CEO, provided an equity commitment for repayment of all convertible debt.

We spoke with Bruce Macdonald, Chairman of C21 Investments. Bruce joined C21 in 2018 after reviewing the company as a personal investment and getting to know the senior management team. Prior to C21, Bruce had a long and successful career in finance and capital markets at one of Canada’s largest banks.

Aaron Green: Can you give a brief overview of C21?

Bruce MacDonald: C21 is a cannabis company that has operations in both Nevada, and in Oregon. Oregon is fundamentally a wholesale business, and we recently announced a divestment of some non-core assets in the state. Our cash cow and where we currently see our best opportunity for future growth is our Nevada operations. We run a seed-to-sale business in the state with two dispensaries doing about $35M a year in revenue, with a 40% EBITDA Margin, and servicing 600,000 customers.

Aaron: Can you tell me about a little bit about your background and how you got involved in a cannabis company?

Bruce: I spent 37 years working for RBC in the capital markets business. I started as a floor trader, back when there was such a thing as a floor, and over the years held a number of positions, ultimately working my way up to Chief Operating Officer of the bank’s global capital markets division. Throughout my time, I built a lot of businesses, which was why C21 and this opportunity was so interesting to me.

My involvement in the cannabis sector was a bit of an accident, but it’s turned into a passion. It actually found me. I was an investor in the C21 IPO. I sat down with management to understand the investment and given my experience, they asked if I would consider becoming a member the Board. Since joining the Board, my involvement has been primarily focused on strategy and the financing side of the business. While I certainly didn’t anticipate it, it’s turned into a 24/7 gig and a challenge I am thoroughly enjoying.

Bruce Macdonald, Chairman of C21 Investments

Aaron: Can you tell me about the history of C21 becoming a MSO? Did you start in one state?

Bruce: While this history predates my time at the company, my understanding is that as a Canadian company, we had first mover advantage to be able to access public funding and get established in the US cannabis space. As part of that, the team at that time reviewed approximately 100 different properties. Because we were based out of Vancouver, the focus was primarily the Western states like Washington, Oregon, Nevada and California. Arizona wasn’t in the game yet. The first transaction C21 did was in Oregon, with a company called Eco Firma. In all, there were four acquisitions in Oregon, and one in Nevada. In fact, it was the investment in Silver State (Nevada) that was by far the most meaningful. As far as our Oregon assets are concerned, we have worked hard to integrate and streamline them into an efficient operation.

So, when I joined the Board, we were just completing the paperwork on the acquisitions, and finalizing our strategy and business plan to go forward.

Aaron: Today there are a number of MSOs. How does this more crowded market impact your value proposition; how do you think about gaining and maintaining strategic advantage?

Bruce: It’s important first to start with strategy. From a strategic perspective, we had the advantage of being the first operator in Nevada with Silver State. Sonny Newman, our CEO, started the business back in 2013. We run a seed-to-sale business so we have a deep knowledge of all aspects of the operation and really know the Nevada market. In fact, 70% on a dollar volume basis of the 700 SKUs that we sell are products that we manufacture. It’s a critical piece of our strategic advantage.  

What I would say is our most important strategic advantage is the fact that C21 is a stable, self-sustaining operator. What I mean by that is we’re one of the few businesses that actually makes money. This is what really allows us to be strategic and disciplined in our approach to growth. For example, it’s been more than 18 months since we did our last capital raise and that’s by choice. Every decision we make is through the shareholder lens and focusing on delivering value to customers and shareholders.

Looking at our value proposition, simply put, it comes down to four things – the right products, at the right price, in the right location, with the right environment. Some people might call this motherhood, but there’s a lot of work that goes behind each of them. 

Great quality products, that’s table stakes. You have to be a top-notch grower and generate quality products that people demand if you want to build a loyal customer base. Right price – to some it sounds like just putting the right sticker on the package – it’s not. It’s all about making sure you are efficient in your operations because to be profitable, you have to be a low-cost producer to deliver on a lower price promise. Tons of work has gone into our operation around being a “right price” business. 

Right location is another important element of our value proposition. We wanted to build a loyal customer base which for us meant focusing more on locals than on tourists. This is why Sonny positioned the dispensaries on commuter paths.

The last key factor is having the right environment to sell our products. In Nevada, the company ended up building fit-for-purpose dispensaries rather than fitting ourselves in a strip mall. We cater to over 600,000 clients a year. Now we’re doing 10,000 curbside pickups a month. With that type of volume, logistically speaking you need ample parking, a well-lit exterior so people feel safe, and of course, great curb appeal. These factors are essential in maintaining a loyal customer base.

Aaron: Tell me more about Silver State Relief and why it has been so successful?

Bruce: I think what you’re really asking for is: what is Sonny’s secret sauce? There are a few ingredients that go into it. As I highlighted, it was a purposeful decision to build a business with a loyal customer base focused primarily on locals. That needs product, price, and convenience. Sonny lives in the Reno area, which is one of the main reasons Silver State is located up North.  

Critical to success has been the culture of the organization. Let’s start with the company being nimble and I’ll give you an example. The early days of the pandemic included the complete shutdown of dispensaries. We went from serving over 1500 customers a day in our stores to the next day being told that we could offer delivery only. Within a week, we were able to pivot and had lockboxes, regulatory approvals and a delivery capability. When you look at our Nevada operation, we ended up with just a 10% dip in our revenues for the quarter, even though we had to live through six weeks of delivery-only and then a phase of curbside-only.

Another key element of the culture is our laser focus on cost management. We’ve talked a little about cost management, but it’s absolutely critical, especially in the context of the high cost of capital that we see in this sector. Add to that the punitive tax impact of 280e where federal tax is applied to gross margins which means SG&A and interest are non-deductible expenses for tax purposes. So, to enhance our profitability, we are intent on having the lowest SG&A of the public cannabis companies. We’re also among the lowest in interest expense. That whole drive for efficiency has given us a formula and a mantra that has allowed us to have a stable business with significant cash flow. We get to make strategic decisions — not hasty or desperate ones — and focus on what’s good for the shareholder.

Aaron: How was C21 capitalized?

Bruce: We did a $33M raise on the RTO of a listed shell company. That was how C21 was established, and then signed contracts with the Oregon and Nevada properties.

Aaron: I recently saw a press release about expanding the Nevada cultivation. Can you give me some more details? 

Bruce: We announced that we are tripling our capacity within our existing 100,000 square foot warehouse facilities. We’re going to build out another 40,000 square feet, and we currently use 20,000. That’s the tripling. Expanding our cultivation was clearly the next logical step in our growth story. This should yield us an additional 7,500 pounds of high-quality flower. We can do this very cost effectively with about $6M in capex, and we anticipate funding the project internally. We will still leave another 40,000 square feet of expansion capacity as market needs justify.

This announcement was significant, but I don’t think it was fully understood by the market. Just to play with some numbers, 7,500 pounds of flower has a wholesale market value today of about $17M. It will cost us approximately $2M in incremental operating expense to add these additional grow rooms. We already pay the rent, so we just need to pay for the people, power, fertilizer and product testing. When you do the simple math, we see this as a big win for shareholders and extremely accretive on an after-tax basis. 

Historically, we always used to grow more than we needed, but with the increase in demand that’s going on in the market, we now run at a flower deficit. In the near term, this build-out will allow is to meet our current retail needs, with the balance that we will sell on the wholesale market. Ultimately, this positions us well on a seed-to-sale basis to support our plans to extend our retail footprint in Nevada. 

Aaron: It sounds like the decision was made based on both revenue growth and supply chain consolidation?

Bruce: Yes, and just the pure profitability of it! You can’t get a bigger, better bang for your buck from spending $6M to generate $17M with ongoing operating costs of $2M.

Aaron: The next question here is about the recent note restructuring and, and how the debentures was restructured. How’d that come about and what is the advantage now of having gone through that process? 

Bruce: This all fits into our medium-term growth strategy. For C21, the first thing we focused on was getting our house in order to ensure that we were efficient and profitable. We knew we needed to have a scalable machine to grow. The second step, which the debt restructuring relates to, was around fortifying our balance sheet. To support our growth plans, we needed to have a solid foundation.

Our balance sheet had two things that needed fixing. One was that we had an $18M obligation coming due to our CEO. The effect of the restructuring extended this obligation over the next 30 months at favorable terms. Additionally, $6.5M of convertible debentures were reaching maturity in January of 2021. And while the debentures were in the money and theoretically would convert to shares, we didn’t want to take the risk that our stock price could drift a bit and all of a sudden there could be significant cash required for redemptions. We’ve seen a lot of companies suffer significant unwanted dilution when their debentures get out of control. So, we approached Wasatch, Jason Wild’s JWAM and CB1 Capital, three seasoned investors, who provided a backstop whereby they would purchase any shares not taken up by people though the conversion of their debentures, so that we would be able to pay any debenture holders back cash with the money we would receive as the investors took shares. In exchange for providing this backstop, C21 gave them an upside participation in the form of warrants. I think it was absolutely critical to get this in place. And it’s phenomenal to have these three names in our corner. We couldn’t imagine better partners.

Aaron: So, what’s next for C21? 

Bruce: I hope you are getting the feeling that here at C21 our objective is to play the long game. That means we make measured decisions with the interest of shareholders top of mind. We’ve worked hard in 2020 to get our house in order, fortify our balance sheet, and generate significant cash flow. I think we’re clocking in at around $12M in trailing annual cash flow, which interestingly, is about the same number that Planet 13 is doing. That’s obviously a fantastic result for a company with $150M of market cap.

“We are working with urgency to break the back of these sector economics.”When we think about our medium-term growth strategy, we will continue to make our decisions through a cash flow and earnings lens rather than hype and flash. While we will remain opportunistic with respect to strategic alternatives, the core of our expansion is going to focus on where we already have a proven track record: Nevada. We’re big believers that to achieve long term success, you have to own your home market. And what I mean by that is today we’re about 5% of the Nevada market. Owning your home market looks more like a 15% share. That is our focus. I think we’ve shown that our disciplined approach delivers results – results such as having top five metrics in Net Income, Cash Flow and EBITDA Margin, across the range of public companies that we can see.

I think it’s key we’re getting noticed. We talked about the strategic investors, but we’re also one of the 17 plant-touching companies that’s in the MSOS ETF. So, we’re going to follow our clear growth trajectory, focused on the bottom line and delivering for shareholders. If you look under the hood right now, you see a 10% cash flowing company, which is a pretty rare bird in our industry. We’re excited about where we are.

One thing I haven’t touched on in great detail is our plans for expanding our retail footprint. How do you grow in the dispensary space? Aaron, I think what’s key here is looking at the expected return relative to the cost of capital. For example, if you targeted buying a dispensary with $20M in revenues, and are able as we are, to generate 25% in after-tax cash based on those revenues, then once optimized, it would generate $5M in earnings. An asset like this is going to trade at roughly one and a half times revenues. So, you’re going to have to pay $30M. For the people that have been going out and borrowing money at 15%, their annual cost would be $4.5M. We’re not going to give four and a half to the moneylenders, it just doesn’t make sense for shareholders. We are working with urgency to break the back of these sector economics. It is something we believe will be afforded to companies with stable earnings and profitability such as ours. Of course, no deal’s a deal until it’s on the tape, but we are very hopeful that we have cracked the code ahead of SAFE Banking to get capital costs down. This is just a little bit of an inside look into our thought processes.   

Aaron: Okay, awesome. All right. That concludes the interview.

Cannabis M&A in the Post-COVID Era

By Jose Sariego
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After a slow start following a disappointing 2019, M&A in the cannabis space closed 2020 with a bang, with more than $600 million in deals announced immediately following the November elections. Prospects for the New Year are expected to continue the explosive year-end trend with a backlog of nearly $2 billion in deals heading into 2021. The COVID-19 pandemic boosted sales of cannabis products, and election results opening up five new states to legal cannabis use and possible federal regulatory reform are further boosting prospects. Analysts now predict the U.S. cannabis market is poised to double by 2025.

Growth is expected to be led by multi-state operators who have achieved scale, cleaned up their balance sheets and stockpiled dry powder for roll-up acquisitions. Cannabis companies raised nearly $134 million in the two weeks before Election Day, a 185% increase over the same period last year. Most of the money flowed to multistate operators. In addition, the biggest stocks by market capitalization saw a roughly 20% bump ahead of the election and now are trading at record volumes, providing plenty of stock currency for further acquisitions.

Among the headline acquisitions last year:

  • Curaleaf continued its multi-state expansion with two of its largest acquisitions – the all-stock purchases of its affiliated cannabis oil company Select and of Grassroot, another MSO player. Curaleaf is now the largest cannabis company in the world based on annualized revenues, with annualized sales of $1 billion and operations in 23 states and 96 open dispensaries. Curaleaf also raised $215 million privately last year end for further expansion.
  • Close behind, Aphria and Tilray announced in December that they will merge, creating what they say will be the largest cannabis company in the world with an equity value of roughly $3.8 billion. The combined entity will have facilities and offices in the U.S., Canada, Portugal and Germany. The deal is expected to close during the second quarter of this year.
  • Also in December, Illinois-based Verano Holdings LLC unveiled plans to go public at a $2.8 billion valuation through a reverse takeover of a Canadian shell company. That deal followed the announcement that Verano will merge with Florida-based AltMed.
  • In addition, publicly traded New York cannabis firm Columbia Care signed a definitive agreement last month to acquire Green Leaf Medical, a privately held Maryland-based cannabis manufacturer and retailer, for $45 million in cash and $195 million in stock. The acquisition is expected to close this summer. Including Green Leaf’s inventory, the Columbia Care will operate 107 facilities, including 80 dispensaries and 27 cultivation and manufacturing facilities. Columbia Care also took advantage of cannabis fever last year by raising $100 million privately.
  • Also in December, Ayr Strategies announced it would acquire Liberty Health Sciences, one of the largest cannabis companies in Florida, for $290 million in stock, as well Garden State Dispensary, a New Jersey marijuana company for $41 million in cash, $30 million in stock and $30 million in the form of a note. This follows Ayr’s $81 million acquisition of an Arizona medical marijuana operator in November. Voters approved marijuana use in Arizona and New Jersey in November.  Ayr has completed a string of acquisitions in Nevada, Massachusetts, Pennsylvania, Arizona, Ohio and, upon the closing of December’s deals, New Jersey and Florida.

Not all cannabis companies will rely on acquisitions, however. Trulieve, as an example, has focused its efforts on Florida and organic growth. It remains to be seen whether a multi-state approach fueled by acquisitions or a single-state organic growth model will prove the more lasting. Growth and profitability in the short term likely will continue to be hampered by limits on economies of scale due to federal restrictions and differing state laws.

In light of the maturing industry and the 2019 bust, the valuation model for acquisitions in the cannabis space is evolving from one based on sales, typically associated with emerging growth industries, to a more mature industry model based on profits or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Most cannabis MSOs have stabilized and generate positive EBITDA, which justifies the evolution away from a sales-driven model.

From a legal standpoint, the same limitations that have vexed the cannabis industry for years will continue to challenge deal makers until there is greater clarity on the federal front. Institutional investor reluctance, financial industry constraints, haphazard state regulation and the unavailability of federal forums such as national copyright and trademark registration will continue to be issues for acquirers and their lawyers in the space.

Acquisition agreements will continue to have to address the federal Damocles’ sword should expected relaxation of federal enforcement under the Biden administration and further legislative relief does not materialize as expected. Although the U.S. House in December passed the “Marijuana Opportunity Reinvestment and Expungement Act” (MORE) to remove cannabis from the Controlled Substances Act, the Senate did not take up the bill in 2020 and it will have to be re-introduced in 2021. Notably, the MORE Act does not affect existing federal regulation of cannabis, such as the Food, Drug and Cosmetics Act, under which the FDA has limited the use of CBD in certain products despite hemp being removed from the Controlled Substances Act in 2018.

The cannabis M&A market is moving into a more mature phase, as MSOs will be choosier in their approach rather than continuing the land-grab mentality of years past. Due to improved financial strength, 2021 should see these MSOs continuing to expand their footprints either within existing states or new ones. Although uncertainties abound, further consolidation and expansion through add-on acquisitions is likely to continue apace in 2021, providing plenty of opportunities for deal makers and their lawyers.