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Financing the Cannabis Industry Part 2: A Q&A with Pelorus Equity Group Managing Partner, Travis Goad

By Aaron Green
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Businesses often require outside capital to finance operating activities and to enable scaling and growth. Financing in the cannabis industry is notoriously challenging with regulatory obstacles at the local, state and federal levels. Recent market dynamics pose additional challenges for both financiers and cannabis operators.

We sat down with Travis Goad, Managing Partner of Pelorus Equity Group to learn more about Pelorus and to get his perspective on recent market trends.

Aaron Green: In a nutshell, what is your investment/lending philosophy?

Travis Goad: Our investment and lending philosophy is focused on being honest, upfront and doing what we say we’re going to do for both our borrowers and our investors. At Pelorus, we lend against cannabis-use real estate assets.

Every lender in this space is a hybrid between real estate and corporate lending. However, if you think about it as a political spectrum, with one side being pure real estate lending and the other pure corporate lending, Pelorus is as close as you can be to pure real estate lending in this sector while also being properly collateralized. What sets us apart from our recently launched lending peers is that we lend against the real estate asset value only, even though we’re collateralized by the real estate and license.

We lend between 60% to 75% of the value of the real estate, which means sponsors need to raise equity for the 25% to 40% remainder of the project cost. This allows us to be covenant-lite for our borrowers while giving them the flexibility to grow their business as they see fit.

Travis Goad, Managing Partner at Pelorus Equity Group

The other lending options in the space are much different. While our lending peers may call themselves mortgage REITs, they really are based on a business development company (BDC) lending model. While they may lend borrowers as much as 150% to 180% of the real estate value, they will require significant financial covenants, require control of major decisions and most often want a board seat. We’ve seen this model severely hamstring growth of companies.

The third option available to sponsors is a sale-leaseback. In this structure, lenders will buy your real estate for 100% of the value, but require you to enter into a 15-to-20-year lease that increases 3% each year. There is a temporary benefit to this model from a federal tax perspective, but that will go away when 280E is addressed, either by descheduling cannabis or amending the tax code.

While this structure means you don’t have to raise equity, it gives up the most valuable asset cannabis companies have in the early stages of the industry. Once you sell this asset, it hampers optionality for sponsors – and in a fast-growing industry like cannabis – optionality is the most critical thing a company has. Pelorus’ structure allows maximum optionality, as well as the ability to lower your cost of capital as the industry matures.

From an investor standpoint, they should know that the BDC and sale-leaseback models are a lot riskier than our model. While we’ve seen those models work well in mature industries, we think the cannabis industry is too early-stage and too volatile to go that far out on the risk spectrum. We have the longest history in the space of deploying capital successfully and seeing it returned. Prior to making any loans, we spend a lot of time underwriting the company we’re working with, the real estate and the projections. We look for strong sponsors, great projects and attractive markets.

Before we entered the cannabis lending space, our team at Pelorus had more than 5,000 transactions under our belt, worth $5B, and we leveraged our decades of underwriting experience when starting the Pelorus Fund. As the first dedicated lender in the cannabis space, we have more data and experience than anyone in terms of transactional volume – we’ve looked at more than 2,000 deals and have made 71 deals, worth $468M. We know the intricacies of every market, the particular ordinances, what the costs should be, and utilize the data to help our borrowers succeed. Through our deals and sustained success, we’ve made a name for ourselves as the most trusted and efficient lender in the cannabis space.

Green: What types of companies are you primarily financing? 

Goad: We finance construction and stabilized loans for a range of clients including MSOs, SSOs and ancillary companies. We don’t lend on outdoor cultivation, but are open to working with any cannabis-related business that has commercial real estate, strong financials and experience in the cannabis space. Today, our sweet spot is closing loans in the $10M to $30M per transaction range, but we can fund loans $100M+ and as low as $5M. Since 2016, we’ve financed 4.2M feet of cannabis-use properties for a total of $468M in loans – roughly 15% to 20% of the entire US market.

Green: What qualities do you look for in a cannabis industry operator or operating group?

Goad: We are meticulous in our underwriting process and underwrite the company, the real estate and the market. We’re one of the few lenders today that has capital to deploy, which has given us the opportunity to continue to take market share while also increasing the quality of our borrowers. Whether you’re an MSO, smaller state operator or ancillary business, we recognize quality across the sector. Brand affinity and shelf space are critical in this market, and we like working with companies that have a competitive edge in getting their branded product to customers. We try to target companies that offer a unique product, or have a unique position within the state they are located.

To qualify for our lending program, borrowers need to own their real estate. If the sponsors own the real estate or intend to own the real estate, we offer two main lending products: we provide construction loans that range between 60% to 75% of the project that are typically 18-month terms; and more recently implemented, we also lend on fully stabilized assets that are cash flowing and operational up to 75% of the value and up to a 5-year term.

By the time a borrower comes to us, they should already have a license (or be acquiring a license at closing), have their required equity raised to completely fund the project and have all local approvals to begin construction.

Green: Capital market dynamics have led to significant public cannabis company revaluations in 2022. How has this affected your business? 

Goad: As far as how market dynamics have impacted our fund, we’ve been pretty insulated because we are a privately held company. From our inception, we’ve worked hard to create an innovative model, and have had many firsts. We were: the first dedicated lender in the cannabis sector; the first lender to become a private mortgage REIT; the first to be issued an FDIC warehouse line of credit; the first to get an investment grade rating; the first to issue an unsecured bond with institutional investors; the first to update our fund to a billion dollars. Amid all these firsts, we made a conscious decision not to go public. This has been one of the best decisions we’ve made and has shielded us from much of the market volatility we are seeing.

As for the broader market, we’ve seen our sponsors that are publicly traded impacted pretty significantly by the recent market dynamics. We’ve also seen flow-on effects for non-publicly traded firms. Our loan book is performing excellently, but we’re in a very challenging market for marijuana-related businesses to raise equity, making debt even more attractive. For most of our competitors, who chose to go public, they’ve been unable to raise much capital to deploy, whereas our market share is increasing and we continue to grow in this tough environment. We remain bullish on the sector in the medium/long term and are finding excellent opportunities to lend in this challenging environment.

Green: Debt on cannabis companies balance sheets have increased significantly in recent years. What is your perspective on that?

Goad: Increased access to debt capital markets is a sign of a maturing market. The U.S. cannabis sector has a great tailwind with growth of new markets, but it’s facing some significant headwinds tied to tax inefficiencies and inadequate state-level enforcement. All of these issues can be solved with political action, but so far that hasn’t happened and it’s causing pain in the industry. These industry dynamics are set against a broader macro backdrop of risk-asset repricing and increased volatility, which leads to outsized volatility in cannabis due to limited liquidity. That increased volatility has made it very challenging to raise equity in this market.

For companies that have strong assets on their balance sheet, they’re still able to access capital via the debt markets. This is creating clear winners and losers, as companies that choose to sell their real estate have significantly fewer capital raising options than those that choose to keep real estate assets on their balance sheets. Overall, this increased debt trend has been great for our business – our pipeline has increased rapidly and we’re able to lend to strong operators with solid assets at attractive rates for investors. Our fund continues to have inflows, and since we’re one of the few lenders with capital to deploy, we’re still open for business and deploying capital in this challenging environment.

Green: How does the lack of institutional investor participation in the cannabis industry affect your business? 

Goad: The current regulatory environment impacts the type of investor that comes into this space. Rather than being dominated by institutions, this sector has largely been funded by retail investors and family offices. This has created challenges in aggregating large amounts of capital, both on the operator and the debt-fund side of the business. It can lead to delays in loan closings, as it takes borrowers a longer amount of time to raise the required equity to close their transaction. As we’re seeing with our publicly traded peer group, it can also lead to lenders having trouble raising capital to deploy. As for Pelorus, we’ve been very fortunate that our length of time in the industry and track record of successfully making loans and having them repaid has set us apart in fundraising. Our decision to stay private has been a critical factor in our fundraising success as well. Overall, the lack of institutional investor participation is a double-edged sword: the lack of liquidity has caused challenges broadly, but since we’ve had significant capital to deploy, it’s created great opportunities for us to make loans with attractive risk/returns in this challenging market.

Green: What would you like to see in either state or federal legalization?

Goad: Given the stalemate in the Senate and the sharp bipartisan divide, I don’t think federal legalization will happen during this administration. That said, there are incremental actions that the government should take to strengthen the cannabis sector. First of all, the Cole Memo needs to be reinstated to add additional protections for cannabis and cannabis-related businesses. As 280E has clearly been detrimental to the overall health of the cannabis industry, we also believe the tax code should be amended, or better yet, we should address the conflict between state and federal policy. We also need to get SAFE Banking approved in order to open up the cannabis sector to credit cards and potentially open up banking to the sector in a more material way. Unfortunately, there’s a choke point in the Senate to get SAFE Banking approved, since there needs to be 60 votes to be filibuster proof. And while there is some talk of SAFE Banking passing during the lame duck session, we are not holding our breath.

Green: What trends are you following closely as we head towards the end of 2022?

Goad: The biggest trends we’re following are on the legislative front (both federally and at state level), which heavily impact revenue and net cash flow growth for the industry. We’re following emerging state markets, such as Alabama and Mississippi, as well as current medical markets poised to transition to adult use in the near term, such as Missouri. The more addressable the population, the faster the industry can grow.

We’d also like to see current legal states address the often-heavy tax burdens that have led to additional challenges for legal businesses and kept illicit markets thriving. No state got everything right at the beginning, but we’re starting to see states address some of the inequities and harmful policies now. California has made some progress in this area, however there are many issues that still need to be addressed.

Federally, 280E is the other major headwind that needs to be addressed as extremely high tax rates are one of the biggest problems for the industry. We’d really like to see that addressed, as cannabis is the only new industry, I’m aware of in the U.S. that has had such disadvantages out of the gate.

An Interview with Würk CEO & Chairman, Scott Kenyon

By Aaron Green
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The cannabis industry operates in a legal gray area between federal restrictions and state legalization in a constantly changing regulatory environment. Maintaining payroll and HR compliance is a burden cannabis companies face that grows exponentially with geographic expansion of the workforce.

Würk allows cannabis companies to manage payroll, human resources, timekeeping, scheduling and tax compliance, minimizing compliance risks in the ever-changing cannabis regulatory environment. The company uses its expertise and trusted partnerships to provide guidance on 280E tax law, accounting and banking. Its platform is designed to scale nationally with the growth of the industry while incorporating the local laws and regulations unique to individual states. Their clients include Cresco Labs, Canndescent and NUG.

We caught up with Scott Kenyon to ask about Würk’s approach to human capital management, challenges facing cannabis businesses and industry trends. Scott sat on the Board of Würk before becoming its CEO and chairman. Prior to Würk, Scott held leadership roles at Dell and Phunware.

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

Scott Kenyon, CEO and Chairman of Würk

Scott Kenyon: My wife and I were early investors in a few companies in Colorado and Nevada. From early on (this was back in 2015) we learned the hard way of cannabis and how difficult it is to run these businesses, especially in those early days. We’ve progressed a ton over the years, but it’s still very difficult to run cannabis businesses.

I joined Würk about five years ago as a board member. I came on as CEO at the beginning of 2021 after our founder and previous CEO Keegan Peterson, who was an early trailblazer in the industry, passed away. So, I’ve been CEO at Würk for about 18 months.

Green: Tell me about Würk and the main problems you’re trying to solve.

Kenyon: Early on we were focused on establishing getting out of the cash business for these cannabis companies. Allowing them to pay payroll, taxes and be tax compliant electronically was a huge early advantage for us as a company. Now, fast forward seven years later and a lot of different banks (credit unions) are in the industry and that is allowing people to move money. So, that’s not as big of an advantage for us anymore, but early on that was huge.

Our advantage now is the scars on our back, for lack of a better phrase, from what we’ve gone through over the last seven years. We anticipate. We prevent. And most importantly we’ve seen all those problems for our customers. Last year, a big thing of mine was being “Smokey the Bear.” We want everybody to be Smokey the Bear: prevent fires and prevent issues for our customers. When I came in, we were the world’s best firefighters. I didn’t want that title. I wanted to prevent issues for our customers. That takes you from being a vendor to a partner.

If you look at it, on our platform we have 80% of the enterprise cannabis market, about 60% of the mid-market and then low single digits in the small business space. We have that market share because we provide invaluable experience and guidance to our customers. The biggest MSOs have different challenges from a “Joseph and Scott” dispensary, or a “Mary and Jane” grow facility. We’re able to adapt to all those different segments.

At the core of our product, we offer payroll services and what we call HCM – human capital management. That’s everything from scheduling, applicant tracking systems processing and paying your payroll taxes. So, we have the full gamut of product offerings that any type of HCM or HRIS software system does, whether you’re outside of cannabis or inside of cannabis, we’re offering the same thing.

Green: How does Würk differ from say a Professional Employer Organization (PEO)?

Kenyon: We aren’t a PEO. We don’t manage employees. At a high-level, a PEO is basically managing HR for these companies. Our platform enables HR professionals to go out there and do that. PEOs are more popular down in the small business space, because people are not at the scale to hire an HR team. We’re similar in that we’re processing payroll and have all the software that these companies need, but we’re different in that we’re not running their HR for them.

Green: How do you work benefits into the mix?

Kenyon: We leave it to the client, and we integrate their benefits provider into our platform so it’s an easy one-stop shop. We have single sign-on for a lot of our integrations. For the HR organizations, we want them to log into our platform and everything they need will be there.

Green: How is SAFE banking going to affect the HR industry in cannabis?

Kenyon: It’s going to be great for the industry, obviously. For HR specifically, it’s going to bring in more providers of payroll and more competitors for us for sure. But also it’s going to bring in more providers of services that can come in and offer that right now because of the federal illegalization.

Green: How does 280E affect your business and your customers?

Kenyon: We don’t guide people around 280E because that’s a tax specific matter. We refer them to their tax experts. We process payroll tax, which is different than what 280E affects. I think 280E was a big challenge, it’s still a big challenge, but that’s mostly because people didn’t really understand it. I think 280E was a problem five to seven years ago. In the last two years most companies are very familiar with it. That doesn’t mean 280E is the right thing. I think 280E is an awful thing. And while I think I hope SAFE banking is the first thing to fall legislatively, I think 280E has a good chance of getting across first.

On any given day my opinion on which will go first changes. I just want something to get across the line.

Green: What are some unemployment and payroll challenges your customers face?

Kenyon: We really watch unemployment changes and changes in job descriptions or job codes. For example, if an unemployment rate changed, and that unemployed person moved to a different place, which happened a lot during COVID, that company needed to report that and they needed to collect the appropriate charges or taxes there.

Green: What geographies are you in right now?

Kenyon: As of January 1, we had people on our platform in 46 states and just under 600 different jurisdictions. So, even though cannabis isn’t legal in all those states, big companies have employees across the United States.

Green: How do you help your users manage compliance across multiple jurisdictions? That must be a complex undertaking.

Kenyon: Our platform automatically plugs into the states that have electronic notifications around laws, which most states do. In our tax department, we have certain group members that are experts, let’s say, in the west coast. So, we assign people to certain regions to ensure that they have the best knowledge.

From our support piece, where a lot of our customers come in, somebody might say, “Hey, I have a unique question for Utah” and we’ll say we have a person that is specialized in Utah, but we don’t force them there, we just give them the option. But in our tax queue, we actually direct the customer like, “Hey, here’s a Massachusetts Question, so that goes to a particular person because they are our Massachusetts expert.”

Green: How do you deal with timekeeping issues like overtime?

Kenyon: Well, our system does that automatically. Let’s say they’re working overtime in a state that’s difficult to keep time for like California. In the state of California, if they’re working overtime on a Saturday or Sunday or a holiday, that’s a whole different calculation than working longer on a Thursday night. So, our platform is made to automatically calculate that for our customers. There’s no manual adjustments or coaching happening there. We just follow the state law based on where the employees are.

Green: Are you seeing any unionization of employees within the cannabis industry?

Kenyon: There’s unionization in many of our states, I don’t know the exact number, but California being the biggest, there’s a lot of union representation. Illinois is probably the second biggest union state on our platform. I’m assuming New York will be once it becomes adult use.

Green: How does Würk approach cybersecurity?

“Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen.”Kenyon: Well, we approach it very seriously and I recommend everybody take cybersecurity seriously. We test our internal systems regularly. We test our employees through phishing scams. And we’re always just trying to educate our team on the risk that we have.

I can’t share specifically the prevention steps that we’re taking, but I can tell you we partner with some of the biggest experts and make sure that we’re following everything that they’re recommending. More importantly, we’re testing for human failures, because where most failures happen is with people.

Green: What trends are you following in the industry right now? 

Kenyon: Any type of activity in Congress is going to be huge for this industry. So that’s something I always keep abreast of. The next thing that comes down the line which is tied to that is interstate commerce: How is interstate commerce going to really come into play? And how does that change this industry?

Within the industry, the big question is how do we combat the illicit market? Over the last five years, I’ve heard all kinds of different ideas. But in the end, I think we have to out-innovate the illicit market, and that’s what I’m most excited about.

There are new product categories, beverage being one that is starting to gain traction. How are these new products and new variations of the cannabis plant able to treat and help people in ways that we’ve never thought of? That’s part of out-innovation. I was reading an article today about new terpenes that were discovered and how 100 products could come from each one of those new terpenes. I think we’re just still at the tip of the iceberg of product innovation.

How do we fight the illicit market? I think that is just through coming up with new products that treat different illnesses and ailments, that allow customers to get away from pharmaceuticals. Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen. They’re not going to do it when there’s a huge price difference, but they will do it when there’s a huge product difference. And right now, our products are very similar to what you can find on the illicit market. You can find vapes, you can find gummies, you can find all that in the illicit market. We’ve got to out-innovate the illicit market.

Green: What in your personal life are you most interested in learning about?

Kenyon: I am the father of two teenagers right now and I really like to learn how to be a better parent to them because it’s really frickin’ tough!

Green: Great, that concludes the interview!

Kenyon: Thanks, Aaron.

Ask the Experts: The Business of Cannabis Meets the Law

By Cannabis Industry Journal Staff
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Practicing Law Institute Press’s Legal Guide to the Business of Marijuana: Cannabis, Hemp and CBD Regulation is a one-of-a-kind deep dive into the many regulations governing the industry. Aimed at attorneys representing clients in this space, the treatise offers guidance on a range of interrelated topics including state regulation of medical and non-medical cannabis; federal law, enforcement and preemption and their implications for employment, taxes and banking; and the various aspects of establishing and managing a cannabis enterprise, from growth to licensing, transport and distribution. We spoke with co-authors James T. O’Reilly, professor of Public Health Policy at the College of Medicine of the University of Cincinnati and author of leading references on food and drug law, and Edgar J. Asebey, a founding partner of Keller Asebey Life Science Law and a life sciences attorney with over twenty years of experience, about the intersection of the cannabis business and the law.

Q: From the legal industry’s perspective, how has this area of the law evolved over the past few years – and what would you advise clients in cannabis to look for when engaging legal assistance for their businesses?

James T. O’Reilly & Edgar J. Asebey: Over the past few years, we have seen a growing acceptance of the idea that lawfully serving the needs of cannabis consumers is a commendable business initiative. This evolution in thinking – tied to the myriad business opportunities cannabis presents – has given large, mainstream corporate law firms the incentive to grow practices and develop specialists in this area, which is a very positive development.

But it is not enough for lawyers to know their way around M&A and the capital markets; they must also have experience with federal regulatory bodies. As regulations continue to evolve, it is essential for practitioners to be familiar with the Food, Drug and Cosmetics Act as well as the Federal Trade Commission Act. The framework for regulating cannabis products already exists, as can be seen in the Warning Letters sent to hemp and CBD companies by both the Federal Trade Commission and Food and Drug Administration (as well as, most recently, the FDA and CDC’s warning about delta-8 THC). If a client places their hemp or CBD product into the stream of commerce, that product will be subject to FDA, FTC and relevant state laws. We strongly recommend seeking out advisors who truly understand these regulations and how they align with the regulatory agencies’ procedures and agendas.

Q: What are the most urgent legal and regulatory topics the industry is watching these days?

O’Reilly & Asebey: Our treatise follows and analyzes the most pressing legal issues facing those in the cannabis and hemp space. In our most recent edition, we add discussion of the Final Rule for the establishment of a domestic hemp production program. We think this is a significant development in that it attempted to address some of the industry’s criticism of some provisions found in the Interim Final Rule, par­ticularly around issues of sampling and testing for THC content. The Final Rule clarified issues around THC percentage testing methodologies, but disappointed many in the industry by leaving in place the low 0.3% dry weight threshold for an acceptable hemp THC level. On the other hand, The Final Rule raises the threshold for a negligent violation from 0.5% to 1.0% total THC and limits the number of violations a grower can receive in one year to one, easing potential penalties for violations.

Of course, the regulation of CBD products is on the minds of many in the industry. Key questions remain about whether cannabinoids such as delta-8 THC can be lawfully sold. Since the FDA has provided no clear guidance with regard to the sale and use of CBD and other hemp-derived cannabinoid-containing prod­ucts, well-meaning businesses find themselves operating in a regulatory gray area. While some states have raced to place delta-8 THC on their controlled substances lists or otherwise regulate it, at the federal level it remains unclear. Our book provides a legal argument showing that current regulations support the lawful production and sale of delta-8 THC. To date, this and other legal arguments have not been tested in the courts and, without FDA guidance, the delta-8 THC sector will remain gray.

Editor’s Note: The Legal Guide to the Business of Marijuana: Cannabis, Hemp and CBD Regulation is now available for purchase here.

About James T. O’Reilly

James T. O’Reilly of the University of Cincinnati College of Medicine is former chair of the 8,000-member Section of Administrative Law & Regulatory Practice of the American Bar Association and has been active in numerous ABA, Federal Bar Association, and state and local bar activities. He retired as Associate General Counsel of The Procter & Gamble Company to teach full-time, and served as a consultant to three federal agencies and to the Deputy Secretary General of the European Commission. He has authored fifty-six texts and more than 230 articles, and his work was cited numerous times in appellate opinions, including “The experts have written . . . ” in a March 2000 opinion of the U.S. Supreme Court (Food & Drug Administration v. Brown & Williamson Tobacco Corp., 120 S. Ct. 1291). He has received numerous honors and awards for his professional and electoral activities and has been listed in Who’s Who in American Law for twenty-five years. He is a graduate of Boston College and the University of Virginia School of Law.

About Edgar J. Asebey

Edgar J. Asebey, a partner at Asebey Life Sciences Law PLLC, is a regulatory and transactional attorney with over two decades of experience in federal regulation of pharmaceutical, biotechnology, medical device, food, dietary supplement and cosmetics companies. Since 2015, he has been working on cannabis-related matters and transactions, and since 2018, he has provided regulatory compliance, business transactional, venture finance and international trade services to hemp/CBD companies. Mr. Asebey practices before the FDA, the USDA, the CBP, the EPA, and the FTC, representing client companies on regulatory compliance, product approval/registration and FDA enforcement defense matters. He founded and served as president of Andes Pharmaceuticals, Inc., a natural products drug discovery company, from 1994 to 2000, and has served as in-house counsel to two life sciences companies. Mr. Asebey is a member of the American Bar Association (Section on Administrative Law & Regulatory Practice: Food and Drug Committee and International Committee), the Food & Drug Law Institute (FDLI), the Dade County Bar Association, and BioFlorida.

Content sponsored by Practicing Law Institute

The Beginner’s Guide to Integrated Pest Management

By David Perkins
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Formulating a Plan

In this article you will learn how to control pests and improve the health of your cannabis plants using integrated pest management, commonly referred to as IPM. This involves a multi-point strategy – there is no quick fix, nor is there one solution that will wipe out all your pest problems. Proper pest management requires patience, consistency and determination.

It is important to understand that not all pesticides are bad. While many are incredibly harmful not only to pests, but also humans, in this article I will educate you about some of the safer alternatives to traditional pesticides. It is possible to safely control unwanted pests in your cannabis garden without harming yourself, your employees or the natural habitat around you.

Every cultivation facility should have a well-thought-out plan for their pest management program. This program should account for the prevention, and if necessary, eradication of: spider mites, russet mites, fungus gnats, root aphids, thrips and caterpillars. These are just a few of the more common pests you’ll find in a cannabis garden. There could also be many other less commonly known bugs, so you have to be vigilant in looking closely at your plants, and the soil, at all times. Complete eradication of a targeted pest can be difficult. Once a pest has established itself, decimating or decreasing the population will require an aggressive regimen that includes spraying daily to control populations and prevent other pests from getting established.

Spraying or applying pesticides to the foliage of plants isn’t the only way to control or eradicate pest populations. There are many other ways that you can minimize the spread of pests without the use of pesticides. In greenhouse and outdoor grows, growing specific types of plants around the cultivation area will attract both beneficial and predator bugs that will naturally control pest populations. Some plants that attract these bugs are: mint, peppers, and marigold. Beneficial and predator bugs, such as ladybugs, predator wasps and predator mites, can control unwanted pest populations in the area before they even have a chance to become a problem in your garden. Plants and flowers that attract bees, birds and insects will also create helpful bio- diversity, making it more difficult for the unwanted pests to thrive.

For indoor cultivation, it is imperative that you have your cultivation facility set up for a proper workflow. If you already have pests, you need to make sure you are not contaminating the rest of your facility when going from one area to the next. Make sure that you only go to contaminated areas at the very end of your day, and when you’re done working in that area, you must immediately exit the building. Do not ever walk back through the uncontaminated parts of your facility or the pests will spread quickly.

An aphid on a plant in a greenhouse

When most people think of pests in their cannabis garden they think of the more common varieties: spider mites, russet mites, aphids and thrips. However, there are also soil-dwelling pests that can exist, without your knowledge. These will decrease the health and vigor of your plants, without you even knowing they’re there, if you’re not careful to check for them. Some of the soil dwelling pests that plague cannabis plants are: root aphids, fungus gnat larvae and grubs. It is just as important to control the pests below the soil, feeding on your roots, as it is to control the pests that feed above soil on your plants.

Maintaining healthy plants is essential to controlling pest populations, both on the foliage and below the soil. Healthy plants will have an easier time fighting off pests than unhealthy plants. Plants have immune systems just like humans, and the stronger the plant’s immune system, the more likely it will be able to ward off pests and diseases. Allowing a plant to reach its full potential, by minimizing pests, means your plants will also have a better quality, smell and flavor, not to mention a bigger yield.

Worker Safety, Regulation and REI times

The application of pesticides requires certification from the state agricultural department. In certain situations, depending on the type of pesticide and method of application, a license may even be required. The application of pesticides without proper certification is against the law. Applying pesticides in a manner that is not in accordance with the label and instructions is also a violation of law.

The proper personal protective equipment (PPE) is required for anybody handling, mixing or applying pesticides. Employees can be a liability to your company if they are applying pesticides improperly. Make sure you and your entire staff are well educated about pesticide use requirements and limitations, prior to usage, and that only a properly certified person is handling the mixing and application at your facility.

The author, David Perkins, In his greenhouse after using insect killing soap.

After a pesticide is applied, you must abide by the re-entry interval (REI). This is the required time period limiting all workers from re-entry into areas where pesticides have been applied. This time period will vary depending on the type of pesticide used and the method of application. In some instances, pesticides applied in the last 30 days may require employee training before work can be done in those areas.

The misuse of or improper handling of pesticides is not only unlawful and dangerous to human health, but can also cause environmental damage to waterways and wildlife. The direct effects of pesticides on wildlife include acute poisoning, immunotoxicity, endocrine disruption, reproductive failure, altered morphology and growth rates and changes in behavior. Pesticides can indirectly impact wildlife through reduction of food resources and refuses, starvation due to decreased prey availability, hypothermia and secondary poisoning. Section 1602 of the California Fish and Game Code governs requirements for permitting of any project where pesticides will be used, and strictly regulates the disposal of all waste and run-off. It is imperative to know the regulations and to abide by them, or heavy fines will ensue!

Using Pesticides in a Regulated Market

Knowing which pesticides you can’t use, to avoid failing mandatory state testing, is just as important as knowing which ones you can use safely to pass required testing. Most states with regulated markets have strict limitations on the pesticides that can be used in cannabis cultivation. Pesticide use in the cultivation of cannabis is the most strictly regulated in the agriculture industry; the pesticides allowed for use in cannabis cultivation are far more limited than any other crop.

Photo: Michelle Tribe, Flickr

Just because a product is certified organic does not mean that it can be used, or that it is safe to be consumed or ingested. Oftentimes when cannabis flower alone is tested it will not fail or show a detectable amount of pesticides or heavy metals. However, when that flower is turned into concentrates, banned substances are then detected in testing, leading to test failures.

Cannabis cultivation facilities that are located on land that was previously used for conventional agriculture, or located near vineyards or other agricultural crops that are heavily sprayed with harmful pesticides, run a very high-risk failing testing. This is because of either spray drift from nearby agriculture, or residual pesticides and heavy metals left in the soil from previous crops that were using pesticides banned for cannabis cultivation. Accordingly, if you’re going to be growing outdoors or in a greenhouse, it is imperative that you get a soil and water test prior to cultivation, so you can determine if there is any potential for test failures due to pesticides or heavy metals in the soil or water in that area. 

Proper Application – Using the Right Tools in the Right Way at the Right Time

One of the most important factors in pest management is proper identification of pests and proper application and coverage of pesticides. It does not require an entomology degree to identify insects, these days there is a lot of information online that can help you identify cannabis pests. Proper identification of insects can make the difference between success and failure. With a good eye and a microscope, if you do your research, you can control most insects in your garden.

In order to control pests in your garden you must get proper coverage of the foliage of the plant when you are applying pesticides. There are different types of equipment that are commonly used to apply pesticides in cannabis cultivation: backpack sprayers, foggers, and airless paint sprayers are the most common. An alternative method involves using an automated dosing system such as a dosatron, which injects fertilizer or pesticides at a specific ratio into your water lines, allowing you to use only the exact amount of pesticide you need. That way you avoid wasting money on unused pesticides. It is also safer for employees because it minimizes employee exposure, since there is no mixing required, and it allows for a large volume to be sprayed, without refilling a tank or a backpack sprayer.

No matter what you are using you must ensure you get the proper coverage on your plants in order to control pests. The temperature and humidity of your cultivation area, as well as the PH and temperature of the pesticide solution, all factor into the success of your IPM. For example, PFR 97 needs to be applied at a higher humidity range, around 70% to be most effective. In some areas this is not possible so repeated applications may be required to ensure the application is effective. A high PH or alkaline PH can cause alkaline hydrolysis which will make your pesticide solution less effective and will dictate how long your pesticides remain effective after they are mixed. It is therefore important to use your pesticide solution as soon as you make it; don’t let it sit around for long periods of time before use or it will be less effective.

In cannabis cultivation there are two different primary growth cycles: vegetative and flower. These cycles require different IPM strategies. In general, during the flowering cycle, pesticides should not be applied after the second week, with some limited exceptions i.e. for outdoor cultivation there is a longer window to spray since the flower set takes longer than a plant being grown inside, or in a light deprivation greenhouse, where there is a 12/12 flowering cycle.

Starting with an immaculate vegetation room is crucial to maintaining pest and mold free plants in the flowering cycle.

For the vegetative (non-flowering) cycle, a strict rotation of foliage spray applications targeting not only pests, but also molds and pathogens, will be necessary to avoid a quick onset of infestation. Starting with an immaculate vegetation room is crucial to maintaining pest and mold free plants in the flowering cycle. Preventative sprays that are safe for use include: safer soap (contact kill) for soft bodied chewing insects; Regalia (biological control) for powdery mildew; and PFR 97 (biological control) for soft bodied chewing insects. It is also helpful to spray kelp, which strengthens the cell walls of plants, making the plant healthier, and thus enabling the plant to better defend itself from pests and diseases. Also, Bacillus thuringiensis (Bt) is useful to prevent or kill caterpillars.

The best way to control a pest infestation in the flowering cycle is at the very beginning on day one. You must start aggressively, with a three-way control consisting of a contact kill and preventative during days 1-14; preventative and biological control during days 10-18; and then release predator bugs on day 25, for optimal results. Knocking back the population with an effective contact kill pesticide early on is essential to ultimately lowering populations throughout the grow cycle, so that you can spray a biological control to preclude them from returning, before you release the predatory bugs at the end of the cycle.

Biological controls can take anywhere from 3 to 10 days before they are effective. Biological pesticides are selected strains of bacteria or fungus. When the plant tissue is eaten by a targeted pest, the bacteria kills the pest from the inside providing control without having to spray pesticides repeatedly. Predator bugs are the last line of defense, used in late flowering. They can be used indoors, outdoors and in greenhouses. An example of a common predator bug is Amblyseius californicus used to control low populations of spider mites, but there are many different varieties and they are specific depending on the type of pest population you seek to control.

A common concern with the use of predatory bugs, is whether they will be present when the flowers are harvested. However, if there is no food for the bugs (i.e. pests) the predator bugs will leave in search of food elsewhere. Further, indoor predator bugs are usually very small in size and difficult to see to an untrained eye. It is very unlikely to see any signs of predator bugs near the end of the flowering cycle, or in the finished flower product. Even when using bigger predator bugs, the bugs will leave the plants when harvested and dried.

Having pests can be very stressful. It is not uncommon to have bugs, pests, rodents, animals and birds cause damage in cannabis gardens. Making an informed decision based on science and not on unproven assumptions can determine how successful you are at pest management. There are many factors that go into pest management and no one situation is the same. You must be dedicated and consistent; pest management never stops. You will always have something ready to invade your garden. Prepare, plan, prevent and repeat!

control the room environment

Environmental Controls: The Basics

By Vince Sebald
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control the room environment

The outside environment can vary widely depending on where your facility is located. However, the internal environment around any activity can have an effect on that activity and any personnel performing the activity, whether that’s storage, manufacturing, testing, office work, etc. These effects can, in turn, affect the product of such activities. Environmental control strategies aim to ensure that the environment supports efforts to keep product quality high in a manner that is economical and sensible, regardless of the outside weather conditions.

For this article, let us define the “environment” as characteristics related to the room air in which an activity is performed, setting aside construction and procedural conditions that may also affect the activity. Also, let us leave the issue of managing toxins or potent compounds for another time (as well as lighting, noise, vibration, air flow, differential pressures, etc). The intent here is to focus on the basics: temperature, humidity and a little bit on particulate counts.

Temperature and humidity are key because a non-suitable environment can result in the following problems:

  • Operator discomfort
  • Increased operator error
  • Difficulty in managing products (e.g. powders, capsules, etc)
  • Particulate generation
  • Degradation of raw materials
  • Product contamination
  • Product degradation
  • Microbial and mold growth
  • Excessive static

USP <659> “Packaging and Storage Requirements” identifies room temperature as 20-25°C (68-77 °F) and is often used as a guideline for operations. If gowning is required, the temperature may be reduced to improve operator comfort. This is a good guide for human working areas. For areas that require other specific temperatures (e.g. refrigerated storage for raw materials), the temperature of the area should be set to those requirements.

Humidity can affect activities at the high end by allowing mold growth and at the low end by increasing static. Some products (or packaging materials) are hydroscopic, and will take on water from a humid environment. Working with particular products (e.g. powders) can also drive the requirement for better humidity control, since some powders become difficult to manage in either high or low humidity environments. For human operations without other constraints, a typical range for desirable humidity is in the range of 20 to 70% RH in manufacturing areas, allowing for occasional excursions above. As in the case of temperature, other requirements may dictate a different range.

control the room environment
In some cases, a locally controlled environment is a good option to reduce the need to control the room environment as tightly or to protect the operator.

In a typical work environment, it is often sufficient to control the temperature, while allowing the relative humidity to vary. If the humidity does not exceed the limits for the activity, then this approach is preferred, because controlling humidity adds a level of complexity (and cost) to the air handling. If humidity control is required, it can be managed by adding moisture via various humidification systems, or cooling/reheating air to remove moisture. When very low humidity is required, special equipment such as a desiccant system may be required. It should be noted that although you can save money by not implementing humidity control at the beginning, retrofitting your system for humidity control at a later time can be expensive and require a shutdown of the facility.

Good engineering practice can help prevent issues that may be caused by activities performed in inappropriately controlled environments. The following steps can help manage the process:

  • Plan your operations throughout your facility, taking into account the requirements for the temperature and humidity in each area and know what activities are most sensitive to the environment. Plans can change, so plan for contingencies whenever possible.
  • Write down your requirements in a User Requirement Specification (URS) to a level of detail that is sufficient for you to test against once the system is built. This should include specific temperature and RH ranges. You may have additional requirements. Don’t forget to include requirements for instrumentation that will allow you to monitor the temperature and RH of critical areas. This instrumentation should be calibrated.
  • Solicit and select proposals for work based on the URS that you have generated. The contractor will understand the weather in the area and can ensure that the system can meet your requirements. A good contractor can also further assist with other topics that are not within the scope of this article (particulates, differential pressures, managing heating or humidity generating equipment effects, etc).
  • Once work is completed, verify correct operation using the calibrated instrumentation provided, and make sure you add periodic calibration of critical equipment, as well as maintenance of your mechanical system(s), to your calibration and maintenance schedules, to keep everything running smoothly.

The main point is if you plan your facility and know your requirements, then you can avoid significant problems down the road as your company grows and activity in various areas increases. Chances are that a typical facility may not meet your particular requirements, and finding that out after you are operational can take away from your vacation time and peace of mind. Consider the environment, its good business!

OLCC-Logo

Audit Finds Oregon Lacking Regulatory Oversight and Proper Security

By Aaron G. Biros
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OLCC-Logo

Last week, Oregon Secretary of State Dennis Richardson published his office’s audit of The Oregon Liquor Control Commission (OLCC). The audit uncovered a number of inadequacies with the regulatory agency, most notably the problems with their tracking system, designed to prevent cannabis form being sold on the black market.

The report highlights the need for Oregon to implement a more robust tracking system, citing reliance on self-reporting, overall poor data quality and allowing untracked inventory for newly licensed businesses. The audit also found an insufficient number of inspectors and unresolved security issues. According to The Oregonian, the OLCC only has 18 inspectors, roughly one for every 83 licensed businesses.

Auditors also found inadequacies in the application system, saying the OLCC doesn’t monitor third-party service providers and doesn’t have a process in place for reconciling data between the licensing and tracking systems. The audit found there is a risk that decisions made for the program could be based on unreliable data. It also found a risk of unauthorized access to the systems, due to a lack of managing user accounts.

Oregon Secretary of State Dennis Richardson
Oregon Secretary of State Dennis Richardson

This audit’s publication is very timely. Most notably because U.S. Attorney Billy Williams, who called Oregon’s black market problem “formidable,” convened a summit this week to examine how Oregon can prevent cannabis being exported to other states. According to the Oregonian, Williams said Oregon has an “identifiable and formidable overproduction and diversion problem.” The audit’s findings highlighting security issues are also very timely, given that in the same week, Oregon’s neighbor to the North, Washington, experienced a security breach in its own tracking system.

The problems with the Oregon tracking system’s security features are numerous, the audit says. They found that the OLCC lacks a good security plan, IT assets aren’t tracked well, there are no processes to determine vulnerabilities, servers and workstations not using supported operating systems and a lack of appropriately managing antivirus solutions. “Long-standing information security issues remain unresolved, including insufficient and outdated policies and procedures necessary to safeguard information assets,” reads the report’s summary.

The audit proposes 17 recommendations for the state to bolster its regulatory oversight. Those recommendations intend to address undetected compliance violations, weaknesses in application management, IT security weaknesses and weaknesses in disaster recovery and media backup testing. You can read the full audit here.