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Alternatives to Bankruptcy for Cannabis Companies: Part 2

By Brent Salmons, Yuefan Wang
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Part 1 of this series discussed the lack of bankruptcy protections for cannabis companies, since bankruptcy in the U.S. is an exclusively federal procedure and cannabis remains illegal under federal law and proposed a number of alternative options for businesses struggling in the current environment. Part 2 of this series focuses on one of these alternatives: state law receiverships.

Background

A cannabis operation facing financial difficulties may try to avail itself, on the one hand, of the contractual remedies described in Part 1 of this series, but these remedies may be flimsy given their narrow scope and reliance on voluntary negotiation between parties whose relationship is already likely tense; on the other hand, the statutory remedies described in Part 1 of this series may be too rigid and absolute, necessitating the disposition of a business as a collection of assets, instead of its continued operation as a going concern. An alternative is receivership, a flexible but powerful quasi-judicial approach paralleling federal bankruptcy able to be administered by state courts. Compared to federal bankruptcy, state receivership is both over and under-inclusive: while receivership can be used in many more situations than insolvency, such as a financially healthy business that is nonetheless subject to regulatory action, receivership provides less comprehensive protection for an insolvent business.

Receiverships have their roots in English and Welsh courts of equity, which were seen as offering fairer remedies than their contemporary common law courts, bound as they were by ponderous precedent. In contrast, courts of equity had more discretion to apply remedies which could be more tailored and “equitable” to an individual petitioner, even if such remedies were not codified. While this separation of equitable and common law courts does not generally exist in the modern U.S. legal system (except for a few hold-out states, most notably, Delaware), the legacy remains in the type of civil remedy available: while most remedies are awarded as monetary redress for a past wrong suffered by a plaintiff (e.g. liquidated damages for the discloser of confidential information or the “benefit of the bargain” for the seller of a company), equitable remedies often require prospective action (or forbearance of an action) by the defendant (e.g. an injunction on disclosure by a recipient of confidential information or specific performance by a purchaser of a company). To draw the analogy out, bankruptcy is a “legal” process to address insolvency since it is governed by a comprehensive regime of federal statutes and rules in the Bankruptcy Code (which is, ironically, applied by specialized federal courts), while receivership is the “equitable” side of the same coin: a judicially-created remedy to manage or liquidate a business, among other actions, where it would not be equitable (or, most importantly for cannabis businesses, not possible) for a bankruptcy action.

Some states with legalized cannabis have cannabis-specific receivership statutes, usually providing that the receiver either be temporarily or fully licensed similar to any other operator of a cannabis business.As an equitable remedy used by various states and federal entities, generalizations about the receivership process are difficult to make. However, broadly speaking, a typical receivership process begins with a complaint filed against the entity for which receivership is sought in state court. This filing can be made by a variety of parties outside of the standard debtor-creditor relationship (reflecting the equitable nature of receiverships), including by regulators and disputing owners of a business. After this filing, a motion to appoint the receiver (which is usually but not always a third party) is filed with the court; consent of the opposing party is generally not required in appointing a receiver but can often make the process easier. The complainant must then establish standing and the occurrence of certain events, including insolvency, but also mismanagement of a corporation or a foreclosure. The requirements of such events are fact-specific and may often be governed by statute or the contractual relationship between parties. The order appointing the receiver usually sets out the specific powers the receiver has in any given case to oversee the disposition or operation of the assets subject to the receivership (called the “receivership estate”) for the benefit of its’s creditors.

Receivership laws generally fall into two categories: some states provide for a broad general statute, sometimes accompanied by statutes specific to industries which are heavily regulated, entity types, or process, while in other states the power is an extension of the court’s powers, set forth in the state’s rules of civil procedure. States also differ as to whether a receivership is considered an independent remedy, a standalone legal action which can be pursued in and of itself (e.g. a petition by a creditor to appoint a receiver to resolve settle an unpaid debt), or an ancillary remedy, a legal action that supports a primary claim (e.g. a request to appoint a receiver in connection with a dispute over the ownership of a business). Some states provide for general receiverships, which allows receivers to take control of an entire business, while other states also allow limited receiverships, which allows the receiver take control of a portion of a business, while the owner operates the remainder. Some states with legalized cannabis have cannabis-specific receivership statutes, usually providing that the receiver either be temporarily or fully licensed similar to any other operator of a cannabis business.1

Below is an overview of the laws and rules governing receiverships in certain states which have legalized cannabis.

Arizona
In Arizona, receivership is governed by statute, with a general statute and specific statutes for certain industries and type of receivership. Arizona law recognizes that principles of equity apply to all matters relating to receivers, providing the court overseeing the receivership with additional power to decide the remedies available to the receiver. In addition, Arizona has enacted a specific statutory framework for the appointment of receivers for commercial real property and personal property related to or used in operating the real property. Arizona also uses a separate receivership statute to provide for corporate dissolution receiverships, in which a court in a judicial corporate dissolution proceeding may appoint one or more receivers to wind-up, liquidate, or manage the business and affairs of the corporation.

There are no specific statutes governing receiverships of cannabis businesses, so the general receivership statute applies to cannabis businesses, subject to Arizona’s rules governing the operation of a cannabis business. For example, Arizona cannabis regulations that require anyone volunteering or working at a medical or recreational cannabis dispensary to be registered with the cannabis regulator similarly apply to a receiver appointed over a licensed cannabis business.

California

California does not have significant entity-specific or industry-specific statutes for receiverships; rather a California court’s power to appoint a receiver is granted under the state’s rules of civil procedure. Receiverships in California are solely an ancillary remedy; a receivership is commenced once a complaint is filed and any party to the action may seek to appoint a receiver. Circumstances that allow for the appointment of a receiver are fact-specific and at the discretion of a judge, although contractual provisions for the appointment of a receiver are given weight under the rules. Sales of assets in the receivership estate must be submitted to, and approved by, the appointing court.

While the rules of civil procedure provide for the general powers of a receiver, the specific powers a receiver possesses in any given case is granted by the judicial order appointing the receiver; this appointment order is therefore, along with the court itself, the primary authority for the parties in any given receivership. California explicitly disqualifies certain persons, such as parties to the lawsuit, an attorney of a party, a person interested in an action, or any person related to any judge of the court within the third degree, as receivers.

While California’s receivership rules do not explicitly contemplate cannabis businesses, receiverships for cannabis companies have taken place, but in our experience are less common in California than assignments for the benefit of creditors (which we will address in a later article). Like other licensed businesses in California, cannabis companies must provide notice to the state regulatory agency which granted the license. It is up to the agency’s discretion whether the business may be operated under the existing license or whether the receiver must secure a new or temporary license.

Colorado

Like California, no generally applicable receivership statute exists in Colorado; instead, receiverships are governed by the state’s rules of civil procedure. Under these rules, a receiver can be appointed under a court’s general equitable powers. Appointment of a receiver is an independent remedy in Colorado, but is contingent on a lawsuit having commenced and the court having deemed the receivership as necessary and proper. In addition to the court’s general equitable powers to appoint a receiver, and unlike California, Colorado has receivership statutes that are entity and industry specific. The entity-specific statutes permit the appointment of a receiver for the judicial dissolution of for-profit corporations, non-profit corporations, limited liability companies, and cooperatives, and the industry-specific statutes permit the appointment of a receiver for the windup of failed insurance companies and the closure of long-term care facilities.

Similar to California, the court order appointing a receiver governs the entire receivership process and any disposition of the assets of the receivership estate must be submitted to and approved by the court.

As befitting the first state to legalize adult-use cannabis, Colorado’s cannabis regulations specifically address receiverships: the rules create a notice and application requirement for all court appointees, including receiverships, and require receivers to register with the regulator as a “temporary appointee” of the court.

Illinois

Illinois does not have a comprehensive receivership statute; instead, the state has industry-specific statutes, including for regulated industries such as nursing home facilities and telecommunication carriers. Illinois also provides for “equity receiverships”, which are used as an ancillary remedy in business disputes in order to stabilize a business that is adversely affected by fraud, neglect, waste, dissipation, or other misconduct during the pendency of the underlying proceeding. If the underlying matter is within the general or statutory jurisdiction of the court, then such court has jurisdiction over the receivership.

There are no specific statutes governing receiverships of cannabis businesses, but the governing statute does contemplate operation of a cannabis business by a receiver, so regulations promulgated thereunder should apply to receivers as well, including with respect to licensing.

Maryland

Adult-use cannabis sales only began in Maryland July 1, 2023. Maryland has a general receivership statute.

Receivers in Maryland are generally appointed by the person seeking appointment, including the court, and must meet certain qualifications, such as not having any material financial interest in the outcome of the receivership, and not having any debtor-creditor relationship with or equity interest in any party to the receivership. While the general receivership statute provides for broad powers of the receiver, including general management of receivership property, hiring professionals, and issuing subpoenas, the court may modify or expand the powers of the receiver via the appointment order.

While there is no cannabis-specific receivership statute, Maryland’s medical cannabis rules contemplate and authorize the transfer of licenses to a receivership; similar rules have been proposed for adult-use cannabis licenses as well.

Nevada

Nevada has a broad receivership statute, in addition to both entity and industry specific statutes. Case law is not well-developed and mostly predates the current statutory scheme, but there is support for a receiver being appointed outside of a statutory context, specifically when the situation is governed by contractual agreement.

The general receivership statute provides that a receiver may be appointed in a variety of situations, such as fraudulent property purchases, foreclosure of mortgages, or the dissolution or insolvency of a corporation.

Nevada has a statutory regime for receiverships for cannabis companies. Unlike the general statute, there are significant requirements for who can be a receiver for a cannabis business. A receiver must first secure a cannabis establishment agent registration card for a cannabis receiver issued by Nevada’s cannabis regulator. In addition, the receiver must submit an application to the regulator accompanied by, among other requirements, a statement saying the receiver has not previously had an agent registration card revoked. The receiver must also provide proof that she has (1) experience or knowledge of the cannabis industry, (2) experience as a receiver appointed by a court, (3) knowledge and skills necessary to make reasonable financial decisions, and (4) adequate financial capacity to fulfill the duties of a receiver. If the regulator is satisfied with the receiver’s application, it will issue the receiver an agent registration card which must be renewed two years after issuance. It is worth noting that Nevada’s statute governing the non-transferability of certain agent registration cards for cannabis allows the regulator to adopt regulations that give priority in the processing of transfers of licenses for transferors subject to receivership. To date, however, no such regulations allowing priority for receivership processing have been adopted.

Washington

Washington has a general receivership statute, but not any entity or industry-specific receivership statutes. Washington’s receivership structure with overhauled in 2004 with the passage of a new law, so it is not completely settled whether receivership is now an independent or ancillary remedy; however, the language of the statute language suggests that it is an independent remedy.

To be appointed a receiver in Washington, the individual must meet certain requirements, including not being a party to, or be closely controlled by a party to, the underlying action and not having materially adverse interest to the person against whom receivership is sought. The general statute specifically outlines the powers of the receiver. Certain actions by the receiver require court approval before being finalized, including the assumption or rejection of executory contracts, and sales of property outside the ordinary course of business.

Washington law specifically provides for receiverships for cannabis companies. To be a receiver, the person must satisfy the requirements of Washington’s receivership law, and either be preapproved by the cannabis regulator or else be approved post-application. In order to qualify for the regulator’s preapproved receiver list, or be approved post-application, the putative receiver must (1) submit an application, (2) have been a Washington resident for at least six months prior to submission, (3) submit to and pass a criminal background check, (4) provide financial disclosures as requested by the regulator, and (5) disclose any interests in the cannabis licensees. Once a person is appointed as receiver for a cannabis licensee, she shall not have a financial interest in, or simultaneously serve as receiver for, another licensed cannabis retailer. The receiver may not also serve as a receiver for, or be a party of interest in, more than five cannabis retail licensees or more than three cannabis producer and/or processor licensees at the same time. Finally, any person who files a receivership action involving a cannabis licensee must provide notice to the regulator.

Part 3 of this series on Alternatives to Bankruptcy for Cannabis Companies continue our review of receivership in various states and other bankruptcy alternatives, including assignments for the benefit of creditors.

Reference

  1.  As cannabis legalization continues to spread, more robust industry-specific receivership rules may be promising given the heavily regulated and specialized nature of the business, similar to how a number of states have industry-specific rules for other heavily regulated industries.

Catching up with Jushi Creativity: A Q&A with Dre Neumann

By Cannabis Industry Journal Staff
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Jushi Holdings is a large multi-state operator with a massive national footprint and a presence in key markets, including Pennsylvania, Illinois, Virginia, Massachusetts, Nevada, Ohio and California. 

About a year and a half ago, Aaron Green interviewed Andreas “Dre” Neumann, Chief Creative Director of Jushi Holdings to learn about his journey to the cannabis industry, Jushi’s market presence, brand development and key trends in the marketplace. 

This time around, we’re checking in with Neumann to hear about his progress since the last time we spoke. In this interview, we delve deep into the world of creative influence, brand building, technology, what Neumann is working on now and what he is excited about in the future. 

Cannabis Industry Journal: It’s been a while since our readers have heard from you. What’s new at Jushi? What Are you currently working on? 

Dre Neumann: When I joined Jushi, we were building the foundation and laying the groundwork for a lot of the things we’re doing right now. One of them of course is our online pre-order platform. We have been focused on connecting all the dots in our vertically integrated markets to make sure our retail experience is really fine-tuned and represents what a diverse range of cannabis consumers find helpful and truly enjoy. In my time at Jushi, I have gained a much better understanding of the average cannabis consumer through constantly analyzing data from our retail spaces, and I very much look forward to analyzing more robust data that’s coming in through our new smartphone app. 

Andreas Neumann, Chief Creative Director of Jushi Holdings

The data we have now is allowing us to look at what product developments are most important for us to move forward with and what product categories we should be focusing most on. Because we may be on the cusp of a recession, the consumer value of our product is that much more crucial. With the introduction of new categories of fast-acting edibles and unique and exciting genetics and types of flower, we are paying close attention to how we can innovate in ways that will both excite our current customers and attract new customers to our brands. 

Jushi is interesting because the company really came together from two key pieces: the first being our strong financial and management backbone, and the second, the powerful creative team that I am a part of. We have such a special focus on the quality of products, with the goal of creating high-quality and consistency across our house of brands.

We have had a lot of acquisitions, which have played out very successfully over time, but early on, through these acquisitions, we found there were products and procedures that weren’t up to our standards. It takes time to fix those things from a quality, genetics and consistency perspective, and I’m thrilled to say we’re really getting there. Notably, we felt the need to improve our edible fruit chew brand, and we poured a ton of time into reinventing and relaunching simple, but high-quality, organic, 100% real-fruit chews. 

Now, we are really seeing the value in our three retail brands and the unique attributes of our branded flower, pre rolls, vapes and edibles. Also, we have been really focusing on improving sustainability as we move towards using much more sustainable, standardized mylar packaging across our product suite. This packaging not only reduces our carbon footprint, as mylar is a much more sustainable, recyclable and lightweight material, but also offers us more real estate to express Jushi’s personality through artwork on packaging and allows us to display our products with a larger presence in stores. 

CIJ: You mentioned Jushi’s new app and you sound so excited about it. Tell us more: how are you using the data to analyze what your customers want? 

The Jushi app, The Hello Club (THC)

Neumann: When we were building our online platform, we knew we needed to better understand our customers. What we found was that the most important marketing tools in cannabis are promos – specifically promos through text messaging. Our loyalty program has become our biggest channel to reach consumers, as we have over 200,000 people we can reach with a simple text message. The big problem with texting campaigns, however, is that mobile phone carriers can limit your deliverability if you don’t have the right verbiage and messaging. So working with and figuring out how to deliver the right message to our customers can be very challenging. 

Our smartphone app, The Hello Club (THC), came about as a natural progression of our customer loyalty program. Our team has a lot of experience working in UX and UI, so we were able to dive right in and build the app through Apple. We really took our time to build something that would add value to our customer, and it’s paid off. For instance, starting out we launched an exclusive weekly deal only available in the app. So, guess what happens? Just yesterday, on the 15th of November alone, 11,000 people downloaded the app. 

Their retail location in Alexandria, Virginia

The app will be something that we play around and experiment with as more and more customers download it. It provides us with a platform to be creative and have fun with our customers, where we can launch exclusive events and strain drops and grant exclusive access to our products before they’re available to the general public. 

The Hello Club was completely designed from scratch. It allows customers to choose their local, preferred store, with the ultimate goal of it becoming the central hub of their cannabis needs. The data we get from the app is so vast and there are so many opportunities on the horizon – we have only just scratched the surface. In the future, as we look to enter new markets, we’re excited to utilize the customer data from our app to guide us in deciding what to sell and where and create unique retail experiences tailored to each market. As we’re just in version 1.0, there’s tons of untapped potential ready to be unearthed and applied. 

CIJ: Around this time last year you said that PA was the most important market for y’all. Tell me about the states that Jushi does business in. Are you paying particular attention to any market more now given the midterm elections?

Neumann: Yes, so Pennsylvania is still our most important market today, mainly because we have so many retail locations in the state (18). Pennsylvania is interesting because it’s also the site of Jushi’s first acquisition ever. I think the inevitable move from medical to recreational in the state will be extremely significant; it will be one of the greatest transitions in cannabis history. Because of our footprint and brand presence in Pennsylvania, we are in an excellent position for when adult use comes online.

The Palm Springs retail location

We call Virginia the sleeping giant because it’s a market we have really cornered. We will have six stores in northern Virginia, close to Washington D.C., in areas with large populations, very diverse demographics and a lot of young people. Our retail locations in the state are freestanding buildings with ample parking – key attributes that benefit customers and lift sales, as we found from the data we collected in Pennsylvania. Virginia has incredible potential because we have made such a formidable early presence with our vertically integrated, IKEA-sized grow operation there. We have applied our findings from other states to Virginia, and we’re thrilled about the opportunity for us to showcase high-quality products in this market. 

California is such a tough market to be in, as it’s the most competitive cannabis market in the world, with some of the most discerning customers, so operators often fear entering the market. But it’s proven to be great for R&D for us, and we continue to learn how to navigate and work in this competitive market through our Palm Springs, Grover Beach and Santa Barbara retail locations. By necessity, we’ve been particularly creative with our marketing and operational strategies to carve a place in the market; we have to show people we have better products and a better experience, which is very difficult with stringent regulations in places like Palm Springs. So California, for us, continues to be a proving ground where we are learning how to be as competitive as possible, and this benefits Jushi as a whole.

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.

Leaders in Infused Products Manufacturing: Part 3

By Aaron Green
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Cannabis infused products manufacturing is quickly becoming a massive new market. With companies producing everything from gummies to lotions, there is a lot of room for growth as consumer data is showing a larger shift away from smokable products to ingestible or infused products.

This is the third article in a series where we interview leaders in the national infused products market. In this third piece, we talk with Liz Conway, Regional President of Florida at Parallel. Liz started with Parallel in 2019 after transitioning from her healthcare IT consulting practice. She now heads up Florida operations for Parallel which runs the Surterra Wellness brand.

Next week, we’ll sit down with Stephanie Gorecki, vice president of product development at Cresco Labs. Stay tuned for more!

Aaron Green: Liz, very nice to meet you. Can you tell me how did you get involved at Parallel?

Liz Conway: Well, I’ll give a little bit of background. Previously, I was working in healthcare technology and in that field, really coming out of health care reform. I was also living in Northern California and so was conscious of a bunch of startups that needed help with highly regulated spaces and policy and how to navigate both the today and the tomorrow of “Hey, we’re trying to build something super fast, but we’re not interfacing with government well enough to know how to build what we’re building and not be set back again.”

And so cannabis actually came to me. I started working with some early stage cannabis IT companies and I was the principal where I founded a firm to do this very thing, which was to help highly regulated companies get through what is today, what is tomorrow, and what can we change. I was really fortunate to be living in Northern California, and I started to help them navigate the California rules.

Then in 2016, when California went adult use, that was just a major time to turn everything on its head and see what we could get. From there, it was history. I started to work with companies, both nationally and in Canada, and met some of the folks with Parallel and was a consultant with them for a while and then joined the team.

Liz Conway, Regional President of Florida at Parallel

Aaron: So, are you in Florida now?

Liz: I relocated to Florida in January 2019.

Aaron: At Parallel, how do you think about differentiating in the market?

Liz: I think that we differentiate in terms of the quality of our product, of course, and I will speak specifically to Florida where our focus is still a medical market. Every day we are trying to manage the vertical from end-to-end so that we can get the products that our people want as quickly as possible over a vast territory. Well-being is such a critical ethos that everything we do comes down to, “alright, what does this mean for well-being and how are we delivering that both in the customer experience as well as in the product?”

Aaron: With regards to differentiation, can you speak to any products in particular that you feel are differentiated in the Florida market?

Liz: In the Florida market, I think that we were the first to launch thera-gels, and the thera-gels really are medicated jelly. You can use it sublingually, or take it as an oral to swallow. From that we developed thera-chews. That line, it’s really great tasting, it’s long lasting, and the effects are getting great reviews from the patients. So that’s one area that I think we distinguish ourselves and we’re a forerunner in the Florida market.

Aaron: So, if you take one of those products as an example, can you walk us through your process for creating a new product like that?

Liz: Well, so remembering that we’re part of companies in other states, because Parallel operates in Nevada, Massachusetts and in Texas. So, we’re not developing products on our own, but we certainly are doing Florida market analysis to say, what should come next, we are listening to our customers, we listen to our people, we’ve got 39 stores across the state. We have a number of employees who are always listening. We also have employees who are part of the medical program who are using the products to address different needs and they are looking at our competitors.

So, we’re doing some competitive analysis. We’re also knowing what it is that we’re really good at, and we take it through a product development lifecycle that involves testing because we are fully vertical. In Florida, we have to always ask ourselves are we able to do this end-to-end and thus far, we’ve been fortunate enough to either build or buy that capability.

Aaron: You mentioned there’s 39 stores in Florida? Are those dispensaries?

Liz: Yeah, they are our stores. There are other stores that other companies have, but we’re the second largest footprint in the state and all over from the very edges of Pensacola down to the Florida Keys, and then over to Miami and up through Tallahassee. So, covering really all corners in the state.

Aaron: Now, with those stores do you also market your products in other people’s stores?

Liz: No. The vertical really means that our stores only carry our own products. We’re marketed in Florida as Surterra Wellness and that’s the name of our stores. Anywhere you go that there’s a Surterra Wellness, you have the same product sets and we’re not allowed to sell other folks’ products. It’s a big difference between Florida and other states.

I’ll tell you one of the nice things is, when I have a product, I know that we grew it. I know every single quality step along the way. I don’t have to go and then look at other vendors and constantly monitor their quality. Everything that we do, we touched it from the very first moment hitting the ground. So it’s nice.

Aaron: Can you walk me through one of your most recent product launches? And if you can, the full lifecycle from the initial marketing briefing up to commercialization?

Liz: Well, I can do some of that. Speaking specifically about those thera-chews – that oral dosing mechanism – we’ve got it in a couple of different flavors. We said to ourselves, “hey, there’s a real need in this market for people to experience something that was like an edible, because Florida just launched edibles.” But we didn’t consider this as an edible because they weren’t allowed at that point. We knew from other states that particularly patients like to dose, you know, with something that is long lasting and flavorful. And so we said, “how can we bring this to market as an oral-dosing product?” And so we conceived the machinery that was able to do it. We had to do quite a bit of tooling.

Prior to that, we did some market testing from our customers and our associates as well as our brand team to say “is this going to be right? Can we bring it to market?” We did the projections around anticipated demand and program growth as well as the cost. We had to figure out what it would it take to adjust the machinery. Will it work? We did some pretty significant testing on that machinery and a lot of flavor testing.

We’re fortunate enough to have one of only four licensed kitchens that can do this kind of R&D in Florida. We’re licensed by the Department of Health for cannabis R&D on an edibles-type kitchen. So we were really fortunate to be able to do that to bring it to market. And from there, it really took on a life of its own. The flavors were tested across all of us (non-dosed flavors, obviously) and we voted on the best products to hit the shelves.

Aaron: When you’re making that decision, how much of the decision was weighted by market demand from your existing customers, and just observing other markets and seeing how products perform in other markets?

Liz: Data is not as prolific as I’d like it to be in cannabis. When you hit the edge of that state line, your consumer is very different, your stores are very different, your marketing capability is very different. So we really had to look across the US and say, “how are products like this performing? Is that how Florida is going to perform?” We did use that state-by-state evidence as well as our own evidence — the response to therapy gels — if we have thera-gels, what type are we selling in terms of dosage and flavors. There are slight differences there in effect-states. And so it was a little bit of both.

Aaron: Next question gets more into like the supply chain. How do you go about sourcing ingredients for your products?

Liz: So again, in a fully verticalized state, we have to source 100% of the active cannabinoid ingredients. Then we have an authorized vendor list that we’ve worked with for other things in terms of flavors and terpenes. Then we have to go back to the DoH to make sure that the other ingredients, whether that be sweeteners, or the kind of wrapping on those thera-gels are okay — the gelatin elements in particular.

“The Florida environment all day long is the biggest hurdle that I think we face.”We use an authorized vendor list. One of the great things that we’ve done recently is to focus our vendor list on minority women and veteran-owned businesses, and so really looking deep in the supply chain to source whatever we can from a diversity of suppliers. I love that original ethos of cannabis to be of the people, by the people and for the people, as well homegrown.

Aaron: Can you give me an example of a challenge that you run into frequently?

Liz: Well, I’ll say in Florida, if you’re growing your own cannabis, it’s way different than if you’re growing it in Colorado or California. So, I’m going to start there. The great news is that after Florida allowed us to start selling smokable flower last fall, we’ve come such a long way. We’ve got new indoor grow facilities. It’s making the environmental issues much, much lower.

“I think that the best thing that we can do is try to look five years ahead and ask what could this look like?”Bringing those on-line is going to bring a much more consistent consumer experience because while I know consumers have a lot of tolerance for variations in their cannabis, but as the industry matures, they’re going to treat us much more like other CPG companies. They’re not going to want that variation. Between that and then Florida’s new testing regulations which also are making sure that the product that’s delivered only meets what’s on the label.

The Florida environment all day long is the biggest hurdle that I think we face. The humidity is much higher here than in other states.

We’re also looking at live resin. What I am watching is the next generation. A lot of live products get us really close to the plant. We’ve done so much to pull out of the plant but where are we going to preserve that original plant in all of its most original formats without having to necessarily smoke the flower itself. We’re working with the Florida Department of Health to help them understand live resin products from a health standpoint.

Aaron: What trends are you following in the industry?

Liz: As you can imagine, as the regional president of a division that goes really end-to-end on monitoring trends in edibles and infused products, medical and recreational, I’m watching the election pretty closely. It will impact banking. It could potentially impact interstate commerce and it could potentially impact research.

I’m also watching things like HR trends, what’s happening in who we employ, our leadership, and how we deal with some of the emerging union issues around the country. I think that the best thing that we can do is try to look five years ahead and ask what could this look like? Where do we put our investment dollars now to meet the future, as well as where do we put our regulatory efforts for the best public policy to have the outcomes that we want consumers to trust us with? I know that’s a really broad answer, but from where I sit, it really is what I’m looking at, across a universe of excitement, but it includes challenges also.

Aaron: The last question is, what would you like to learn more about in the cannabis industry?

Liz: Well, of course, if I had a crystal ball, that would be great. I think the data is always missing. The more data that we could get, there’s so much out there that people are using cannabis for and we just don’t understand the impacts on how is this wonderful well-being product helping so many people because a lot of people don’t like to talk about it. So the more data about our consumers and what they like and what they don’t like, even across state lines, as we could aggregate that in a uniform way. I think it would help a lot of the people who are fearful of cannabis and it would help a lot of us who are in the business, get the consumers exactly spot on what they want, which at the end of the day is why we’re all here.

Aaron: Thank you Liz, that’s the end of the interview.

Soapbox

How to Vote for Cannabis Research on November 3rd

By Dr. Jordan Zager
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It was 1996. I was four years old. California Proposition 215 passed and for the first time, legal medical cannabis became available. I don’t remember it honestly, but that moment triggered a reckoning of outdated and ineffective efforts to control cannabis, which continues on November 3rd.

The moment in 1996 created for me and my generation of millennials a new, decriminalized lens for which to view cannabis and its potential. In my lifetime, from first experimenting with cannabis after high school and then earning my PhD in plant biochemistry, advancing cannabis research, to starting an agtech company dedicated to the genetic improvement of cannabis, we continue this march toward legalization. But another march hasn’t started yet.

The cannabis we consume today is still largely the same (albeit more potent today) as the cannabis that was legalized in 1996. There’s been little advancement in our scientific understanding of the plant. This can and should change. I believe the future and legitimacy of the cannabis crop in the medical field and in farmers’ fields is on the ballot this November.

Five states have cannabis on the ballot for November 3rd

In 33 states, medical cannabis is currently legal and in eleven of those, including my home states of Nevada and Washington, legalized adult-use recreational cannabis is generating millions in tax revenue every month. But compared to every other commercial crop, cannabis is still decades behind.

We are seeing a glacial cadence with cannabis research. As voters in five more states consider this November whether to legalize cannabis, that same tipping point we reached in 1996 comes closer to being triggered for cannabis research.

Here’s what cannabis scientists, like me, face as we work to apply real scientific methods to the long-neglected crop: I published one of the most cited papers on cannabis research last year, titled, Gene Networks Underlying Cannabinoid and Terpenoid Accumulation in Cannabis. But, as per university policy, we were unable to touch the plant during any of our research. We could not study the physical cannabis plant, extracts or any other substantive physical properties from the plant on campus or as a representative of the university. Instead we studied cannabis DNA processed through a third-party. Funding for the research came from private donors who were required to be unassociated with the cannabis industry.

While we were conducting our heavily restricted, bootstrapped cannabis research, the university lab in the next building over was experimenting with less restrictions on mice using other drugs: cocaine, opioids and amphetamines. (Quick note, marijuana is listed as more dangerous than cocaine, which is a Schedule II drug.)

I get it. Due to the federal prohibition on cannabis as a heavily regulated Schedule I drug, universities cannot fund research without the risk of losing all of their federal funding. While the USDA does not support research and SBIR grants are all but impossible, one government agency does allow research, from cannabis grown only in Mississippi. It’s the Drug Enforcement Agency (DEA) and any research conducted using its crop is as ineffective as you’re imagining. Relevant research is likely impossible using the crop which dates back to a 1970’s strain with a potency that’s about 30 percent of today’s commercial cannabis offerings.

To change this anti-research climate, do what those in California did with Prop 215 in 1996. Vote.

Dr. Jordan Zager, author and CEO of Dewey Scientific

Vote for legalization of cannabis if you’re in those five states where legalization is on the ballot; that’s Arizona, New Jersey, Montana, South Dakota and Mississippi. The more states that align with cannabis legalization, the stronger the case becomes for the federal government to reschedule the drug from a Schedule I controlled substance. Currently cannabis is listed as a Schedule I alongside heroin. The DEA claims cannabis has no currently accepted medical use and a high potential for abuse. Both are not true, just listen to the scientists.

Those outside of the five states putting cannabis on the ballot can still play a role in creating a Congress that is more receptive to cannabis reform. This Congress is the oldest, one of the most conservative and least effective in our country’s history. Younger, more progressive representation will increase our odds of advancing cannabis research.

Cannabis holds far too much possibility for us to allow it to be an unstudied “ditch weed.” THC and CBD are just two of nearly 500 compounds found in cannabis which, when scientifically scrutinized will harvest – I believe – vast medicinal and commercial benefits and the tax windfalls that accompany both. But first you have to vote.

If cannabis and your representatives are not on the ballot, do something millennials have built somewhat of a reputation for failing to do; pick up a phone and call your current representative. Tell them cannabis deserves scientific attention and investment. There’s too much potential in the cannabis plant to wait any longer.

The Brand Marketing Byte

Business Development Impact: Chalice Farms

By Cannabis Industry Journal Staff
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The Brand Marketing Byte showcases highlights from Pioneer Intelligence’s Cannabis Brand Marketing Snapshots, featuring data-led case studies covering marketing and business development activities of U.S. licensed cannabis companies.

Here is a data-led, shallow dive on Chalice Farms:

Chalice Farms – Business Development Impact

Based in Oregon, this company is a retail and edibles brand in the Golden Leaf Holdings portfolio. Chalice Farms has a number of locations in the Portland area, capitalizing on an effective regional strategy.

However, 2019 was a tough year for Oregon cannabis companies. Increased competition and heavy market saturation led to plummeting prices, forcing Chalice Farms to implement layoffs last Spring. 2020 appears to show Chalice Farms doing much better than the previous year.

In addition to tightening operations, the company engaged in several new business development initiatives recently. They’ve expanded distribution of their signature fruit chews into California and Nevada. They also implemented a sales initiative called “an extended 420 celebration,” covering the month of April. All six of the company’s branded retail locations have pivoted to curbside pickup and home delivery during the coronavirus pandemic.

All of those initiatives led to a boom in earned media for Chalice Farms. They were mentioned on CNN and in Forbes, among other national news outlets. The company also improved their web activities considerably, adding keywords, backlinks and a notable increase in web traffic.

Chalice Farms ended the month of April on a high note, moving to the 11th hottest web property, according to data from Pioneer Intelligence. This continued into May; Chalice Farms claimed the #26 position on the Pioneer Index, the highest it has been to date.

The Brand Marketing Byte

Cannabis Brands in Culture: Tyson Ranch

By Cannabis Industry Journal Staff
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The Brand Marketing Byte showcases highlights from Pioneer Intelligence’s Cannabis Brand Marketing Snapshots, featuring data-led case studies covering marketing and business development activities of U.S. licensed cannabis companies.

Here is a data-led, shallow dive on the California brand, Tyson Ranch:

Tyson Ranch – Cannabis Brands in Culture

To just about every American, Mike Tyson is a household name, even after retiring from boxing for more than 15 years. For the uninitiated, Mike Tyson founded Tyson Ranch (TR), his cannabis licensing and branding company, about two years ago. The brand’s flower, extracts and infused products are distributed to dozens of dispensaries throughout California.

Last year, the brand developed plans for a boutique luxury resort outside of Palm Springs. About six months ago, the brand expanded its footprint to another state, with TR cannabis products showing up on dispensary shelves in Nevada.

Last week, Tyson Ranch gained some media attention, but this time not by anything Tyson himself had done. The Simpsons aired a cannabis-focused episode where they featured a character based on Tyson, Drederick Tatum, a former boxer who now resides in Springfield, the fictitious setting of the show. The episode’s storyline gives a major nod to the TR brand with a mention of an upscale luxury resort dedicated to cannabis.

That earned media attention helped Tyson Ranch soar in Pioneer’s weekly index of the hottest U.S. cannabis brands, earning TR the #2 spot. This also ends March with a bang for TR, climbing from the 40th position overall in February to the 28th presently.

Nevada Lab License Suspended Amid Potency Results Investigation

By Aaron G. Biros
1 Comment

Back in September, Nevada officials announced a state-wide investigation into how products with high levels of yeast and mold were sold in dispensaries and alleged that labs could possibly be manipulating potency numbers on certificates of analysis. Then in late November, regulators suspended the license for Certified Ag Labs, a cannabis testing laboratory based in Sparks, Nevada.

Nevada regulators issued a press release alleging that products tested at Certified Ag Labs “may be labeled incorrectly and could contain a different level of THC than what is listed on product packaging.” Randy Gardner, a managing member at Certified Ag Labs told the Las Vegas Review-Journal that investigators showed up to his lab in October twice to collect samples for follow up tests.

On November 18, a state notice posted on the door of the lab read, “Registration and License Suspended,” according to the Las Vegas Review-Journal.

After that, Gardner fired back. In a statement sent out shortly after, Gardner said they were accused of lying about THC test results to the Department of Taxation (the agency that regulates cannabis in Nevada).

“The state’s decision to suspend and potentially revoke our license came without warning,” says Gardner’s statement. “This accusation is as baseless as it is appalling, as we have been completely transparent with the state at all times. We take this matter very seriously, and based on my over 30 years of laboratory experience we believe these allegations unconscionable at best.”

“The state came in for their audit then came back and suspended our license without us having a chance to further clarify or refute their findings,” the statement reads. “We hope the state appreciates that a business and its employees’ livelihoods and reputations are at stake. We are pursuing our options and all legal and equitable redress will be on the table.”

The Department of Taxation, which isn’t releasing any more information currently, says they found “inaccurate and misleading” potency test results, once they tested the samples collected from Certified Ag Labs.

This isn’t the first time Nevada regulators have suspended lab testing licenses. When Nevada legalized adult use sales and the market became operational back in 2017, the state suspended a lab’s license in September of that year. Then in late 2017, Certified Ag Labs and another lab had their licenses suspended for “not following proper lab procedures and good laboratory practices,” according to Stephanie Klapstein, spokeswoman for the Department of Taxation. Those licenses were reinstated in January of 2018.

The New ISO/IEC 17025:2017: The Updated Standard

By Ravi Kanipayor, Christian Bax, Dr. George Anastasopoulos
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As state cannabis regulatory frameworks across the country continue to evolve, accreditation is becoming increasingly important. Because it provides consistent, turnkey standards and third-party verification, accreditation is quickly emerging as an important tool for regulators. For cannabis testing laboratories, this trend has been especially pronounced with the increasing number of states that require accreditation to ISO/IEC 17025.

As of 2017 there were nearly 68,000 laboratories accredited to ISO/IEC 17025, making it the single most important benchmark for testing laboratories around the world. ISO/IEC 17025:2005 specifies the general requirements for the competence to carry out tests including sampling. It covers testing performed using standard methods, non-standard methods and laboratory-developed methods. It is applicable to all organizations performing tests including cannabis labs. The standard is applicable to all labs regardless of the number of personnel or the extent of the scope of testing activities.  Developed to promote confidence in the operation of laboratories, the standard is now being used as a key prerequisite to operate as a cannabis lab in many states.

There are currently 26 states in the United States (also Canada) that require medical or adult-use cannabis to be tested as of February 2019. Of those states, 18 require cannabis testing laboratories to be accredited – with the vast majority requiring ISO/IEC 17025 accreditation. States that require testing laboratories to attain ISO/IEC 17025 accreditation represent some of the largest and most sophisticated cannabis regulatory structures in the country, including California, Colorado, Maryland, Massachusetts, Michigan, Nevada and Ohio. As a consequence, many cannabis testing laboratories are taking note of recent changes to ISO/IEC 17025 standards.

ISO/IEC 17025 was first issued in 1999 by the International Organization for Standardization. The standard was updated in 2005, and again in 2017. The most recent update keeps many of the legacy standards from 2005, but adds several components – specifically requirements for impartiality, risk assessment and assessing measurement uncertainty. The remainder of this article takes a deeper dive into these three areas of ISO/IEC 17025, and what that means for cannabis testing laboratories.Objectivity is the absence or resolution of conflicts of interest to prevent adverse influence on laboratory activities.

Impartiality

ISO/IEC 17025:2005 touched on an impartiality requirement, but only briefly. The previous standard required laboratories that belonged to organizations performing activities other than testing and/or calibration to identify potential conflicts of interest for personnel involved with testing or calibration. It further required that laboratories had policies and procedures to avoid impartiality, though that requirement was quite vague.

ISO/IEC17025:2017 emphasizes the importance of impartiality and establishes strict requirements. Under the new standard, labs are responsible for conducting laboratory activities impartially and must structure and manage all laboratory activities to prevent commercial, financial or other operational pressures from undermining impartiality. The definitions section of the standard defines impartiality as the “presence of objectivity.” Objectivity is the absence or resolution of conflicts of interest to prevent adverse influence on laboratory activities. For further elaboration, the standard provides similar terms that also convey the meaning of impartiality: lack of prejudice, neutrality, balance, fairness, open-mindedness, even-handedness, detachment, freedom from conflicts of interest and freedom from bias.

To comply with the new standard, all personnel that could influence laboratory activities must act impartially. ISO/IEC 17025:2017 also requires that laboratory management demonstrate a commitment to impartiality. However, the standard is silent on how labs must demonstrate such commitment. As a starting point, some cannabis laboratories have incorporated statements emphasizing impartiality into their employee handbooks and requiring management and employee training on identifying and avoiding conflicts of interest.

Risk Assessment

Both the 2005 and 2017 versions contain management system requirements. A major update to this is the requirement in ISO/IEC 17025:2017 that laboratory management systems incorporate actions to address risks and opportunities. The new risk-based thinking in the 2017 version reduces prescriptive requirements and incorporates performance-based requirements.

Under ISO/IEC 17025:2017, laboratories must consider risks and opportunities associated with conducting laboratory activities. This analysis includes measures that ensure that:

  • The lab’s management system is successful;
  • The lab has policies to increase opportunities to achieve its goals and purpose;
  • The lab has taken steps to prevent or reduce undesired consequences and potential failures; and
  • The lab is achieving overall improvement.

Labs must be able to demonstrate how they prevent or mitigate any risks to impartiality that they identify.To comply with ISO/IEC 17025:2017, labs must plan and implement actions to address identified risks and opportunities into management systems. They must also measure the effectiveness of such actions. Importantly, the standard requires that the extent of risk assessments must be proportional to the impact a given risk may have on the validity of the laboratory’s test results.

ISO/IEC 17025:2017 does not require that labs document a formal risk management process, though labs have discretion to develop more extensive methods and processes if desired. To meet the requirements of the standard, actions to address risks can include sharing the risk, retaining the risk by informed decision, eliminating the risk source, pinpointing and avoiding threats, taking risks in order to pursue an opportunity, and changing the likelihood or consequence of the risk.

ISO/IEC 17025:2017 references “risks” generally throughout most of the standard. However, it specifically addresses risks to a laboratory’s impartiality in section 4.1. Note, the new standard requires that labs must not only conduct activities impartially, but also actively identify risks to their impartiality. This requirement is on-going, not annually or bi-annually. Risks to impartiality include risks arising from laboratory activities, from laboratory relationships, or from relationships of laboratory personnel. Relationships based on ownership, governance, shared resources, contracts, finances, marketing, management, personnel and payment of a sales commission or other inducements to perform under pressure can threaten a laboratory’s impartiality. Labs must be able to demonstrate how they prevent or mitigate any risks to impartiality that they identify.

Assessing Measurement Uncertainty With Decision Rules

ISO/IEC 17025:2005 required (only where necessary and relevant) test result reports to include a statement of compliance/non-compliance with specifications and to identify which clauses of the specification were met or not met. Such statements were required to take into account measurement uncertainty and if measurement results and uncertainties were omitted from the statement, the lab was required to record and maintain the results for future reference.

ISO/IEC 17025:2017 requires similar statements of conformity with an added “decision rule” element. When statements of conformity to a specification or standard are provided, labs must record the decision rule it uses and consider the level of risk the decision rule will have on recording false positive or negative test results. Like the 2005 version, labs must include statements of conformity in test result reports (only if necessary and relevant- see 5.10.3.1 (b)). Now, test result reports on statements of conformity must include the decision rule that was employed. 

Moving Forward

Because many states require ISO/IEC 17025 accreditation for licensing, cannabis testing labs across the country would be well advised to closely monitor the implications of changes in ISO/IEC 17025:2017 related to impartiality, risk assessment and measurement uncertainty. If you run a cannabis testing lab, the best way to ensure compliance is education, and the best place to learn more about the new requirements is from a globally recognized accreditation body, especially if it is a signatory to the International Laboratory Accreditation Cooperation (ILAC) for testing laboratories, calibration laboratories and inspection agencies.

References

Facts & Figures

ISO/IEC 17025:2005: General requirements for the competence of testing and calibration laboratories

ISO/IEC 17025:2017: General requirements for the competence of testing and calibration laboratories 

Digipath Labs Now ISO 17025:2017 Accredited

By Aaron G. Biros
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According to a press release published in December, Digipath Labs, based in Las Vegas, Nevada, was recently accredited to the updated ISO standard, ISO 17025:2017. The laboratory received their accreditation from Perry Johnson Laboratory Accreditation (PJLA).

ISO 17025:2005 has long been the standard that labs seek accreditation to, but their newest 2017 edition was recently rolled out and introduced to the market. The new 2017 standard includes some broad changes to terminology, process approach, scope, and it importantly introduces the concept of risk-based thinking.

That concept of risk-based thinking is particularly relevant to the cannabis testing market, where many have argued for more transparency and uniformity in different state regulations and markets. Introducing risk-based thinking in the standard means that assessors also look at the risk of bias, impartiality and assessing measurement uncertainty, which certainly adds a layer of subjectivity to the accreditation.

PJLATracy Szerszen, president/operations manager of PJLA, says the newer standard also includes a provision for a quality management system review among other changes. “We are making sure they are following the standard from a technical standpoint, meaning they have the right equipment, the appropriate personnel and also have a quality management system,” says Szerszen. “November 29, 2020 is the deadline for moving to the new 2017 standard.”

According to Todd Denkin, CEO and founder of Digipath, obtaining the new ISO accreditation poises them for future growth and expansion. “Digipath Labs has now brought its standard of excellence in cannabis testing under the updated ISO-17025:2017 umbrella as we seek to expand our dominance in cannabis testing markets,” says Denkin. “This is a major step in positioning Digipath as a global leader in testing services.”