For the uninitiated, delta-8 THC is a cannabinoid that can be synthesized from cannabidiol (CBD) derived from hemp. It is an isomer of delta-9 THC, the more commonly known psychoactive cannabinoid found in cannabis. Delta-8 THC does produce psychoactive effects, though not quite as much as its better-known cousin, delta-9 THC.
Due to loopholes in federal and state laws, namely the 2018 Farm Bill specifying that hemp must contain less than 0.3% Delta-9 THC, delta-8 THC is technically legal across the country. It grew in popularity across the United States very quickly over the past year, largely due to online sales.
Following the surge in sales, a number of states including Colorado, Alaska, Arizona, Arkansas, Delaware, Idaho, Iowa, Mississippi, Montana, Rhode Island, Utah and Washington have implemented some form of regulation or outright ban on products containing delta-8 THC. Christopher Hudalla, president and chief scientific officer of ProVerde Laboratories, told Chemical & Engineering News that he has a lot of safety concerns about the whole delta-8 THC craze. Hudalla says he’s more concerned about the processing involved to produce it in large quantities. “These are pretty aggressive synthetic conditions that use strong acids,” Hudalla says. “They might be using strong bases to neutralize. They can use metal catalysts. I hear different people doing it different ways.”
The FDA shares similar concerns. Their fourth point in the consumer update mentions that delta-8 THC products “often involve use of potentially harmful chemicals” in its production. They even claim that some manufacturers might be using unsafe household chemicals to synthesize delta-8 THC. “The final delta-8 THC product may have potentially harmful by-products (contaminants) due to the chemicals used in the process, and there is uncertainty with respect to other potential contaminants that may be present or produced depending on the composition of the starting raw material,” reads the FDA report.
In their consumer update, they note that between December 2020 and July 2021, they received 22 adverse event reports. Of the 22 reports, 14 were hospitalized following ingesting a delta-8 THC product. Notably, those reports included reactions consistent with symptoms from overconsumption of delta-9 THC, such as vomiting, hallucinations, trouble standing, and loss of consciousness.
The FDA says that national poison control centers received 661 cases of delta-8 THC products, with 41% being unintentional exposure, 39% involved pediatric patients and 18% required hospitalization.
In the consumer update, they tell the public that delta-8 THC products have not been evaluated by the FDA and that they “may be marketed in ways that put the public health at risk.” This includes marketing it as a hemp product, which it is. Still though, many consumers associate hemp products with somewhat innocuous things, like CBD oil, which is mostly harmless.
The FDA also mentions in the update that delta-8 THC does have psychoactive and intoxicating effects. The FDA says they are notifying the public about the delta-8 THC due to an uptick in adverse event reports, marketing that is appealing to children and concerns regarding manufacturing with unsafe chemicals and contaminants.
Earlier this summer in July, Senators Chuck Schumer, Ron Wyden and Cory Booker held a press conference where they introduced the first draft of the Cannabis Administration and Opportunity Act (CAOA). During the press conference, the Senators laid out the foundation for their comprehensive cannabis legalization measure, emphasizing the need to address social equity and social justice matters, while also asking for support in revising the draft bill.
In response to that call for input on the draft legislation, a number of nonprofits and trade organizations last week submitted comments. Among the organizations to submit comments on the new legislative proposal to end federal cannabis prohibition were a lot of cannabis advocacy organizations: The National Cannabis Industry Association (NCIA), the Marijuana Policy Project (MPP), the National Organization for the Reform of Marijuana Laws (NORML), the Minority Cannabis Business Association (MCBA) and the Coalition for Cannabis Policy, Education, and Regulation (CPEAR). To refresh your memory, CPEAR is a controversial trade organization founded in March of this year by corporate interests in big alcohol and tobacco.
Regardless of the interests behind the organizations, all of them seemed to have comments that aligned with one another. All of the comments submitted by those organizations had a common theme: social equity. Even CPEAR submitted comments highlighting the importance of “providing substantial opportunities for small and minority-owned businesses.”
The NCIA’s comments are perhaps the most comprehensive of the group, outlining an equitable, state-centric and small business-focused plan for federal cannabis reform. The MCBA’s comments reflect its mission and focus on things like restorative justice, minority participation, equitable access and inclusion.
The MPP’s comments are noteworthy because of their concerns regarding a number of regulations. Karen O’Keefe, state policies director at the MPP, says certain aspects of the regulatory scheme need clarification. “Our two major areas of concern are: the possible upending of state licensing and regulatory systems — driving sales underground — and the impact on medical cannabis access, including for those under the age of 21,” says O’Keefe.
NORML’s feedback is also particularly poignant. They ask to leave medical cannabis markets exempted from the federal excise tax proposed and for the federal government to balance roles shared between the FDA, TTB and ATF to ensure that individual state markets won’t be adversely affected by federal regulation.
Sleep health is a large and growing global market. According to Statista, the global market value of the sleep market was $432B in 2019 with an expected CAGR of 6.3% from 2019 to 2024. Supplements are a growing category of popular sleep health products with common ingredients including melatonin, valerian root, and more recently cannabinoids such as CBD and CBN.
RealSleep is a cannabinoid formulation company developing personalized products to improve sleep outcomes. RealSleep’s product strategy has been developed by top scientists and sleep experts, and clinically tested to aid individuals seeking to fall asleep faster, sleep deeper and cut down on sleep disturbances. Their studies have shown that 90% of people taking RealSleep have reported experiencing better sleep immediately
We spoke with Michael Kamins, co-founder and partner of OpenNest Labs and RealSleep, about RealSleep’s innovation in personalized formulations for better sleep. Kamins founded RealSleep as an incubated company under OpenNest Labs, where he is also a founding partner. Michael is the Chief Community Officer of the Wholistic Research and Education Foundation, and just led the world’s largest study on CBD and general health with Wholistic and Radicle Science, where he is also an advisor. Prior to RealSleep, Michael worked in tech where he was an early employee at Musical.ly (now TikTok) building brand partnerships.
Aaron Green: How did you get involved in the cannabis industry?
Michael Kamins: I got into the industry professionally about two and a half years ago, but my relationship with the plant goes back to high school. Prior to jumping into this space, I was working primarily in digital media. I was an early employee at Musical.ly, (eventually rebranded as TikTok), leading global music partnerships and growth. I helped grow that business by leveraging the social capital of music artists and celebrities and doing partnerships with record labels. At the end of 2018, I really saw the opportunity in the cannabis space. One of my best friends in Los Angeles, Dr. Jeff Chen, someone I did my MBA with at UCLA, became the founder and executive director of cannabis research at UCLA Medical. Seeing all the clinical research that he was doing and the objective health outcome data coming out of that research was really a huge inspiration to me. I saw a massive whitespace and opportunity to help build that bridge between the medical community and the cannabis marketplace. There’s been almost a century of cannabis prohibition setting back our scientific understanding of the plant. We know more about the rivers and plants in the Amazon than we do about the composition and compounds within the cannabis plant with regards to their wellness benefits.
I met my partners, Tyler Wakstein, Kris Bjornerud and Max Goldstein and we started a cannabis venture studio called OpenNest Labs, which is building out a diversified portfolio of cannabis consumer brands. We are focused on leveraging our collective experience at building ventures and communities and rallying those communities around a brand.
Over the last two and a half years, it’s been super exciting building brands that you see on shelves. We’re still in the early stages right now of building brand loyalty. A lot of cannabis consumers are still going into dispensaries and asking, “what is the cheapest product that I can buy with the highest potency?”
Green: Tell me about RealSleep, how did you come up with the idea and what is the basic concept for the end user?
Kamins: RealSleep comes from the passion that I had developed for medicinal aspects of the cannabis and hemp plant, thinking about not only THC and CBD – which are two major cannabinoids in the plant – but also thinking about the other 120 plus cannabinoids, each with their own unique properties.
It turns out that half the world’s population suffers from one poor night of sleep a week, and sleep issues lead to the highest rate of other comorbidities. We were thinking about the addressable sleep market, with ourselves being a part of that market, and wanting to build products that would help not only ourselves, but the countless other people around the world that suffer from poor sleep too, as it impacts their daily lives.
I’ve had issues with sleep myself. I have a genetic hearing condition called tinnitus. It’s a ringing in your ears that other people can experience environmentally from exposure to loud noises. I’ve had loud ringing in my ears my entire life even in quiet situations, like right before I go to sleep. I’ll often be lying in bed awake for an hour or two unable to sleep with the ringing. Everyone else on the team has had their own sleep issues and realized the profound negative impact of lack of sleep on other areas of health and wellness, whether it be next day energy or immunity.
We felt that by leveraging our access to the medical research community and even running clinical research on our own to validate the efficacy of the product relative to other products on the shelves, we could create a product that was safe and effective. We came across a clinical trial on insomnia and CBD by one of our research partners, the Wholistic Research and Education Foundation. What we saw from a lot of that anecdotal data was that CBD, and hemp in general, really helps to provide restful and restorative sleep.
CBD and CBN are two highly effective compounds for sleep and melatonin is by far the most widely researched and used over the counter sleep aid. We are sourcing clinical research on other ingredients such as valerian root, L-Theanine and GABA, and the list of ingredients goes on. We were interested in formulating a product that incorporates these safe and effective ingredients.
We noticed from our research and our access that sleep is as unique to an individual as their fingerprint. Take brainwave patterns when you are sleeping as an example. No one person’s patterns are the same. You could essentially identify an individual based on those patterns. One solution, or one product, is not going to help everyone. So, we worked with UCLA and the head of their laboratory of sleep and circadian medicine, a gentleman by the name of Dr. Chris Colwell, to understand the science of sleep. He is one of the most renowned sleep researchers in the world and is the head of our scientific advisory board for RealSleep. We’ve done clinical studies with over 900 people and 10,200 nights of sleep and used this data to develop a personalization engine in the form of a quiz that takes 90 seconds and allows us to map ingredients to specific answer selections. From these answers we deliver products that are customized to the individual consumer specific to their unique needs
We’re proud of the journey that we’ve gone on to understand the science and research behind sleep and to develop this personalization engine variations of products that work for each individual and their unique needs.
Green: Tell me how the questionnaire and personalization engine works. I understand the ingredient profile will change based on the customer’s responses?
Kamins: Sleep impacts an individual’s general health and wellness. For me, if I don’t sleep well, my next day is filled with anxiety, and that anxiety leads to worse sleep; it’s a vicious cycle. For other people, it could be a metabolic issue that leads to poor sleep or poor sleep that leads to weight issues. The list of other health issues and diseases linked to poor sleep goes on. So, while we’re looking at combating sleep to prevent other health issues down the road, one person who’s looking to get better sleep to improve one aspect of their life could be different from another person and the area of life they are looking to improve upon.
The quiz is essentially a combination of validated, reliable and flexible measures of patient reported outcomes. We use a combination of gold standard patient reported sleep questionnaires, one of which is called the Pittsburgh Sleep Quality Index, another being the RAND MOS scale, and others. We also work with our scientific advisory board and machine learning experts to advise us on customizing these questions with logic. We then use the responses to generate the appropriate formulations for our customers.
The questions cover everything from very specific questions on sleep, like sleep latency (the time it takes to get the bed) or sleep fragmentation (the number of times you wake up in the middle of the night) sleep duration, sleep quality, and then other areas of health that you’re looking to improve upon. Examples include metabolism, cardiovascular health, skin health, anxiety and stress. So, all these things factor into the different ingredients that we layer into the formulation.
Let’s say you don’t have a problem getting to sleep, but you wake up a lot of times in the middle of the night. Your formulation might be very different from someone who has trouble getting to sleep, but they don’t wake up in the middle of the night. Overall, one of our big goals with the formulation of all these products is that they increase your next day cognitive alertness by giving you that high sleep quality and restorative sleep. We don’t want to make anyone groggy the next day. Because overall, what you’re trying to achieve with sleep is you want to be ready to go the next day and be able to perform at your peak.
Green: So, you mentioned CBD, CBN and melatonin already as ingredients. Are there any other ingredients?
Kamins: Depending on what your answer selections are for the quiz, we will layer in L-Theanine, valerian root, Ashwagandha and even some of the other novel cannabinoids like CBC (cannabichromene). We have about 24 different ingredients that we can layer in, so it just depends. When you look at all the permutations and combinations of formulations and dosages, it’s in the trillions. From a supply chain standpoint, we’ve simplified it in a way that makes it very easy to funnel people into one of many predefined combinations of ingredients and dosage levels.
Our algorithm is an unstructured machine learning algorithm. The more people that take the quiz and the more people that provide feedback on their sleep score makes our programming and our personalization engine smarter.
Green: How does your manufacturing and packaging work?
Kamins: We have a strong relationship with a pharmaceutical partner that we have been growing even before RealSleep. It is a pharmaceutical manufacturing facility underneath a regional health care provider in the state of California. Everything they do is incredible. It’s a state-of-the-art facility and focused on complete transparency and building the products with the highest efficacy and safety profiles. They’re based in LA, and they’ve been such a pleasure to build our supply chain with.
Green: What kind of trends are you looking at in the formulation space?
Kamins: From a cannabinoid side, there’s been a bit more of a look towards some of the novel cannabinoids that have traditionally catered to a niche consumer base that is educated on cannabis. From being inside the industry, it’s very easy for me to talk about all the different cannabinoids, but a lot of people still don’t even know the difference between THC and CBD.
Our goal overall is to build efficacious products and educate people on all the different formulations and the different ingredients going in. Outside of cannabis, this year we’ve seen a large boom in consumer demand for Ashwagandha. There’s just so much hype around it in terms of how it impacts stress and energy and even libido, which is interesting. It’s probably the hottest non-cannabinoid ingredient that we’ve seen. Specific to sleep, the combination of L-Theanine and GABA and how they potentiate each other is impactful. Then there’s valerian root, which has been a big one over the last few years for sleep.
Green: Last question. What are you most interested in learning about?
Kamins: A personal interest of mine over the last few years is understanding from a scientific perspective, each of the cannabis compounds in greater detail. I think part of it is just really the curiosity to know the unknown. We’re at a point in the industry where there are still so many unknowns on the science-side of cannabinoids.
My passion for science has led me to support medical researchers in the space, so much so that I am an advisor and chief community officer to a nonprofit medical research organization called the Wholistic Research and Education Foundation, which to date has funded over six and a half million dollars in human clinical trials with cannabinoid rich therapeutics. One we’re currently conducting at UC San Diego is studying the impact of CBD on autism and other neurological conditions. That’s given me incredible exposure to research in the space. I am also a strategic advisor to a for profit medical research organization called Radicle Science, which is a very swiftly running clinical research for CBD and other cannabis brands in the space.
All in all, I’m driven by the possibilities that come with continuing to unlock the science behind the plant. By doing so, we can innovate products with efficacy and can educate people who are uninformed about the therapeutic benefits of cannabis, which will in turn benefit the industry and society. Striving for research breakthroughs and being transparent about our findings is going to help us destigmatize cannabis and legitimize the industry.
Green: That concludes the interview. Thanks, Michael!
Earlier this year, the Colorado Department of Public Health and Environment (CDPHE) announced a plan to introduce new testing rules for the state’s growing hemp industry. Under the new regulations, hemp products must be tested for residual solvents, heavy metals and pesticides, in addition to making sure they contain less than 0.3% THC.
The CDPHE are planning on a gradual rollout to prevent any supply chain issues or a lab testing bottleneck, similar to what we’ve seen in other states launching new testing requirements in years past, such as Arizona or California. Well, the Colorado rollout appears to be hitting similar snags and because of supply chain issues related to instruments and consumables in laboratories, the implementation of those testing rules is somewhat delayed. What was originally supposed to be implemented over the summer was pushed back to an October 1 deadline, and that deadline has now been pushed back to 2022.
As a result of supply chain shortages and the learning curve to test for such a wide range of pesticides, Colorado is opening hemp testing to out-of-state labs in an effort to stay on schedule with the rollout. Dillon Burns, lab manager at InfiniteCAL, a cannabis testing company with locations in California and Michigan, just completed an audit with the CDPHE in their work to get certified and start conducting hemp testing for businesses in Colorado.
Burns says they’re well-acquainted with the list of pesticides because of how similar the list is to California’s requirements. “For the pesticide testing rules that were supposed to go into effect on August 1st, it’s basically the same list as California just with slightly different action levels,” says Burns. “I would say these action limits are generally stricter – they have much lower LOQs [limits of quantification].”
Come January 1, 2022, they are expecting an additional 40 pesticides to be required under the new rules. “But currently, it’s still unclear when these regulations will actually go into effect,” says Burns. The full pesticide testing list is currently slated to be implemented on April 1, 2022.
The supply chain issues referenced above have a lot to do with what the state is asking labs to test for. Previously, most of the pesticides tested for under Colorado’s adult use and medical cannabis programs could be analyzed with an LC/MS. A handful of pesticides on the new list do require GC/MS, says Burns. It’s entirely possible that a lot of labs in Colorado just don’t have a GC/MS or are in the process of training staff and developing methods for using the new instrument. “Cleanliness of these instruments is such a priority that it takes time to acquire the right skill set for it,” says Burns.
The new testing rollout isn’t just another compliance hurdle for the cannabis industry; these rules are about protecting public health. Dillon Burns said he’s seen hiccups in California with the amount of new hemp farmers getting into the space. “The hemp products we’ve tested in California often fail for pesticides,” says Burns. It’s a lot easier in most states to get a license for growing hemp than it would be for growing adult use cannabis. “You’ll see a lot more novice growers getting into hemp farming without a background in it. They’ll fail for things they just haven’t considered, like environmental drift. We see a lot of fails in CA. Hemp is bioaccumulating so it presents a lot of problems. If they’re not required to look for it, they weren’t monitoring it.”
When asked how the market might react to the new rules, Burns was confident that Colorado knows what they’re doing. “I don’t anticipate that [a testing bottleneck] happening here. The regulators are reasonable, supportive of the industry and opening it up to out-of-state labs should help in preventing that.”
Let’s just say it. There is an undeniable chaos in the cannabis industry. It doesn’t matter if you’re a big or small operator, it’s likely that you don’t have a documented system for creating and managing ever-changing SOPs or for consistently training all employees on the most current versions of those SOPs. This chaos is often the result of rapid growth, mergers and acquisitions, and the ever-present turnover in our industry. When department leadership changes, and it often does, established policies and procedures are often left behind. In some cases, this is a positive sign of growth. As a company outgrows SOPs and as it develops more sophisticated ways to cultivate, extract, process, manufacture, package and sell cannabis and cannabis products, inevitably, the old ways of doing business need to be replaced. For those operators who have prioritized operational excellence, whether they want to position their company for new investment, merger or acquisition, or just want to create a consistent and standardized, branded product, it’s critical to get control of SOPs, training and documentation.
As with most big goals, to obtain operational excellence, you need to break the goal into manageable steps. Assuming you have accessible quality policies and procedures in place, properly training employees when they first start work and on an ongoing basis as policies and procedures change is the number one key to successful operations. When employees know how to do their job and understand what is expected of them, they are positioned for success. When employees are successful, it follows that the company will also be successful. Documenting operations is a second important step in obtaining operational excellence. While training and documentation appear to be different, in best-practice organizations, they are inextricably linked.
One Set of SOPs
Those of us who have been in the cannabis industry for a while have experienced firsthand or heard stories of facility staff working off of two sets of SOPs. There’s the set of SOPs that are printed or digitally available for the regulators, let’s call them the “ideal” set, and then there are the SOPs that actually get implemented on a day-to-day basis. While this is common, it’s risky and undermines the foundation of operational excellence. Employees often know there are two sets of SOPs. Whether they express it or not, many are uncomfortable with the intentional or unintentional deception. When regulators arrive, will they have to bend the truth or even lie about daily operations? Taking the time to establish and implement one set of approved SOPs that is compliant with both external regulations and internal standards is good for employee morale, productivity and ultimately, profits.
What’s the best way to get control of a facility’s SOPs? Again, break it into manageable steps:
First, task someone with reviewing all SOPs that are floating around. Determine if any are non-compliant, which ones need to be tossed and which ones need to be revised so they work for the company as well as outside regulatory authorities.
At a minimum, establish a two-person team to draft, review, publish and distribute the final SOPs. Ensure that at least one member of the team has management level authority. Assign that employee the responsibility of reviewing the SOPs before “publication” and distribution.
Archive, delete, or actually throw away outdated or non-compliant SOPs
Revise or create new best-practice SOPs that are in compliance with external regulations and internal standards
Establish a system to update SOPs when external regulations and internal standards change
Use a naming convention that distinguishes draft SOPs from final SOPs, for example, “Post-Harvest Procedure, FINAL”
Inform employees that they will be retrained on the new SOPs and that approved SOPs will always have the word “Final” in the title
Store the final SOPs in an easily accessible location and give employees access, not only during training, but on an ongoing basis
Centralized Repository for Final SOPs
Storing final, approved SOPs in one easily accessible, centralized location and giving employees access sounds simple, but again, this is the cannabis industry, so this often doesn’t happen. Many of us have or are currently working for an organization that stores SOPs in multiple places. Each department may have its own way of updating, disseminating and storing SOPs. Some SOPs are stored in a printed binder stuffed in a drawer or left on a bottom shelf. Others are stored digitally. Some use both systems, which creates confusion. Who knows if the digital versions or the printed versions are the most current? Surely someone knows, but often the front-line staff do not.“Once you’ve established a single set of compliant SOPs and have stored them in one accessible location, it’s time to train your employees.”
Establishing a centralized repository for final, approved SOPs is the foundation of operational excellence. It lets employees know that operations are organized and controlled, and it reassures regulatory authorities and external stakeholders—think insurers, bankers, investors—that the company prioritizes compliance and organization. And external stakeholders who believe that an organization is proactive and well-run tend to be more forgiving when the inevitable missteps occur. Companies that are organized, have effective training systems, regularly conduct internal audits to identify potential issues and take identifiable action steps when necessary to remediate issues, receive fewer deficiency notices, violations and fines than their less organized competitors.
Many states require cannabis operators to provide a specific number of training hours prior to an employee beginning work, and a specific number of continuing and refresher training hours annually. Once you’ve established a single set of compliant SOPs and have stored them in one accessible location, it’s time to train your employees. To do so, set clear expectations and decide who is responsible for what. Is the HR manager responsible for initial onboarding and training? Are department managers responsible for ongoing and annual training? Create a training responsibility chart that works best for your company; write it down and share with all stakeholders.
The next step is to figure out how to train your employees. Individuals have different learning styles, so ideally, you’ll offer multiple ways for them to master the requirements of their position. Assign written materials and if possible, attach short videos showing the best way to complete a task. Follow up with a quiz to determine comprehension and a conversation with a department lead or manager to answer questions and review the key take-aways. Ideally, the department manager or lead employee will work with the employee until they are competent and comfortable taking on new assigned tasks and responsibilities.
Sum It Up
Operational excellence begins with:
Knowledge of and access to current external rules and regulations and internal standards
One set of approved and easily accessible policies and SOPs that comply with both external and internal standards
An initial training system with clearly assigned roles, responsibilities, and goals
An ongoing training system with clearly assigned roles, responsibilities, and goals
Test knowledge before employees begin unsupervised work
Stay up-to-date with all changes to external rules and regulations and internal standards
Control policy and SOP revision process
Inform all stakeholders when policies and SOPs change
Test that employees understand new standards
Document all key areas of operation on a recurring basis
Address deficiencies and evaluate whether SOP revisions are warranted
Document and implement necessary remediation when necessary
For those of you rolling your eyes and thinking you don’t have time for this, ask yourself, “Can you afford not to?”
For those of you committed to operational excellence and doing what it takes to get there, congratulations on being a visionary leader. Your efforts will pay dividends for your own company and will help the cannabis industry grow into a well-respected, profitable industry that improves lives.
The rise in the number of optimistic regulatory frameworks instigated by various regional governments will positively anchor the forecast for the cannabidiol (CBD) market. The growing awareness regarding the benefits and effects of the product as an alternative treatment method has accelerated its preference among consumers and suppliers. Moreover, the continued advancements in the approval processes by various authorities worldwide have also made way for numerous opportunities supporting CBD market growth.
According to a report by Global Market Insights, Inc, the global CBD market size could exceed $108.8 billion by 2027.
Growing presence in cosmetics
The overall industry share from creams and roll-on products is poised to hit a 35.8% CAGR up to 2027. This is owing to the increasing scope of CBD in cosmetic applications as it is highly effective in treating skin conditions. This, as well as its anti-inflammatory characteristics from a medicinal perspective, are leading to increased demand for CBD products like creams and roll-ons.
Scope in the treatment of mental health
CBD market value from anxiety/stress applications exceeded USD 1.5 billion in 2020 due to the growing need for helping mental health. The World Health Organization reported that over 4.5% of the total population in Europe suffers from depression. This escalating anxiety and stress rate has encouraged healthcare practitioners to increasingly make use of CBD-based medications.
Higher demand for oral administration
Demand for oral cannabidiol administration held nearly 45% of the industry proportion in 2020 due to its growing preference considering the gradual relief of pain compared to other disorders. The increasing dependency on the oral administration route for product development by several manufacturers will add positive impetus to market growth.
Medical benefits of cannabis
Annual revenue of the CBD market from the segment of the market dealing with THC (and CBD) products is expected to cross USD 30.1 billion by 2027. This is largely due to its increasing penetration across various countries and regions on account of its legal status. Furthermore, the relatively higher THC content of the compound has led to its growing usage to combat medical conditions, including Alzheimer’s and Parkinson’s disease, among others.
Online distribution to see a considerable footprint
The online CBD industry was responsible for more than 46% of the market in 2020. This is mainly due to the numerous advantages of online channels, like on-time delivery and adequate inventory, compared to their offline counterparts. Besides, this distribution platform minimizes the operational costs related to the maintenance of brick and mortar retail.
Australia to lead the regional landscape
Australia dominated the Asia Pacific CBD market by holding over 25% of the market share owing to the expanding geriatric population and the liberal stance of the regulating bodies in the region. The permittance to the medicinal and cosmetic use of CBD products is likely to spur regional adoption. The rising amendments in regulatory scenarios have also triggered awareness regarding the potential benefits of the product in the country. For instance, in April 2020, the Australian government released a new proposal for over-the-counter CBD in a bid to relax its narcotic scheduling whilst making it a Schedule 3 substance.
Providers of various CBD products are actively indulging in numerous growth strategies, like acquisitions and partnerships, to reinforce their market presence. For example, Mota Ventures Corp., in January 2020, acquired Spanish producer and online retailer, Sativida OU in a USD 2.2 million deal. The acquisition expanded the company’s presence in Europe and Latin America.
Although the demand for CBD is likely to experience certain hesitation from consumers in the short term, the market will witness lucrative growth in the long run. However, counterfeit and substandard quality products may potentially restrain industry expansion to some extent.
In this “Flower-Side Chats” series of articles, Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses integrate innovative practices to navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.
4Front Ventures Corp. (CSE: FFNT) ( OTCQX: FFNTF) is a multi-state operator active in Washington, Massachusetts, Illinois, Michigan and California. Since its founding in 2011, 4Front has built a reputation for its high standards and low-cost cultivation and production methodologies earned through a track record of success in facility design, cultivation, genetics, growing processes, manufacturing, purchasing, distribution and retail. To date, 4Front has successfully brought to market more than 20 different cannabis brands and nearly 2,000 unique product lines, which are strategically distributed through its fully owned and operated Mission dispensaries and retail outlets in its core markets.
We interviewed Andrew Thut, chief investment officer of 4Front Ventures. Andrew joined 4Front in 2014 after investing in the company in 2011. Prior to 4Front, Andrew worked in investment banking and later moved on to public equity where he was a portfolio manager at BlackRock.
Aaron Green: How did you get involved in the cannabis industry?
Andrew Thut: I came at it from the investment side of things. I started my career as a junior investment banker right out of school and then I was a public equity analyst and Portfolio Manager. I ran small-cap growth portfolios for BlackRock where I was on the team for a better part of 11 years.
One of my friends, Josh Rosen, who came from the finance industry, got interested in the cannabis industry really in 2008. He founded 4Front as a consulting company officially in 2011 and I came in as an investor. After that original investment, I left BlackRock and I was looking for something different to do. I was tired of chasing basis points and running public market portfolios. Josh said to me “This industry needs more talent,” and I became more and more involved at 4Front as the years went on. In 2014, I came into the business full time. Originally, I was someone that was kind of the gray hair in the room when we were applying for licenses. We had to go to different municipalities and convince them that we were going to be responsible license holders. I also spent a lot of time on the capital raising side for our business leveraging my career in corporate and more traditional public finance. These are incredibly complex businesses that require a fair amount of capital in some places. So, that’s how I originally got into the business.
These are complicated businesses in a lot of cases. The “sausage making” in cannabis is incredibly complicated. There’s friction at every step along the way. As an example, when you’re buying a building where you want to cultivate your product, you can’t get a mortgage from a typical bank.
While those of us that have been in the industry like to gripe and complain about it, this friction is also the opportunity. Because more traditional investors can’t invest in this industry yet, it allows us more time to build our businesses and have some protective moats around it from a competition standpoint until those folks do come in. So, all this friction is a pain and it’s brutal, but it’s also the opportunity here in cannabis.
Green: Can you speak to the transformation of 4Front from consulting to MSO?
Thut: The original business was consulting. Our original investor was sensitive about touching the plant – it’s one thing to offer services to a federally illegal business, it’s another thing to directly run a federally illegal business. For example, 4Front would have consulting clients that were interested in acquiring a license in Massachusetts. Because of our expertise and our standard operating procedures, we could apply for licenses in limited license states on behalf of our clients and help them show regulators competence and give the regulator’s confidence that these operators knew what they were doing. So, we would help our clients win the licenses and then once those licenses were won, our operations folks would come in and help them get up running.
When I came into the business we said, “well, geez, we have quite a track record helping clients win licenses and get open. If we’re good at winning these licenses and getting them open, why aren’t we just doing this on our own behalf?” So, in 2015, we shifted the business from consulting to being a multi-state operator. We leveraged our capabilities in regulatory compliance and winning licenses to go and get those on our own behalf. We also leveraged our financial expertise in M&A to add to our portfolio, so what we ended up with was a seven-state portfolio at the time.
Green: Chief Investment Officer is an uncommon title, even in the MSO space. What does your day-to-day look like?
Thut: I spend an awful lot of time helping management plot our strategy, and then figuring out how we are going to pay for our growth. Not only structuring finances for the company, but also having contact with our existing and new investors.
I spend a lot of my day to day thinking about where we want to be as a business and what geographies we want to be in. If you look at cannabis longer term, we have less interest in being cultivators or farmers. We think that’s going to be the most quickly commoditized piece of the value chain. We like retail as a business, but I think that we have less interest in managing hundreds of retail locations scattered across the country. We ultimately want to be a finished goods manufacturer. What we think is going to matter longer term is establishing low-cost production.
There is a lot of price elasticity in the end markets for cannabis meaning if you get customers a quality product at a much better price than the competitor, you’re going to take outsize market share. To offer that lower price, you have to be efficient. Over the years, we have figured out how to bring the labor cost out of our production. We have 25 different brands with 1000s of different SKUs of products that have dominant market share in states like Washington. And we’re now putting them into Illinois, Massachusetts, California, Michigan, and hopefully New Jersey.
Green: Do you have a preference towards acquisition, or do you seek growth through internal investments?
Thut: We are always weighing build versus buy. We want our products to have dominant market share, or very strong market share in every state we are in, and we have a lens towards what gets us there faster and most efficiently. For instance, we have two cultivation facilities and one production facility here in Massachusetts – about 15,000 square feet of canopy in the state. That will just about serve our three retail locations in Massachusetts.
Back to our bigger investment thesis, we believe that we should be a finished goods wholesaler in every state that we’re in. We know our products are incredibly well received and we know that consumers love our price point. In Massachusetts, for instance, we’re currently evaluating if we need more capacity from a cultivation standpoint and a production standpoint. And if we do where do the lines cross in terms of whether we should build versus buy that additional capacity?
We are currently in five states, including our facility in Washington has dominant market share in one of the toughest markets in the world for cannabis – somewhere close to 9% market share in Washington. Our brands are in the top 10 of every single category from flower to vapes, to edibles everything across the board. And what we’re doing our strategy is simple. It’s taking those tried-and-true products and operating procedures that have been so effective in Washington, and we’re replicating them in other states where we have licenses: Massachusetts, Illinois, and Michigan, California and hopefully New Jersey. We’re looking for more state, but we want to be deep in the states we’re in.
We also have a lot of confidence that you know, having been having translated some of these, having been able to effectively take our Washington success story and port it to other states. We’re looking for other states to sort of bring into the portfolio because we feel like we’re in a position now to stamp it out.
At our facility in Washington, which is the number one edibles manufacturer in that state, we produce the edible Marmas which is our the number one selling gummy in Washington. We produce 3,500 boxes of those in one shift using 25 people in Washington. Our facility is one of the lowest cost producers in the country.
We are opening what we think is going to be a very disruptive facility in Southern California right now. The facility is 170,000 square feet of purely automated finished goods production. So, rather than making 3,500 boxes of our gummy squares in one shift using 25 people, with the automation that we have in California, we can make 30,000 boxes. So, 10x one shift for the same number of people. We look more like the Mars Candy Company than most investors would think of when they see a typical cannabis company. We’re bringing that kind of scale and automation.
Green: What are some of the industry trends that you’re watching closely?
Thut: We keep a close eye on limited license states. States like Massachusetts and Illinois. For various reasons Massachusetts is very tough to get zoned. So, there’s going to be a limited number of players in a state like Massachusetts, which means you can have pretty good moats around your business and pricing will hold up over several years. We love limited license states like that, where price is going to hold up. On the other hand, we’re not afraid to enter a state like California where we think our low-cost production expertise uniquely qualifies us to go into a huge market like that and be disruptive and take a lot of the pie.
“You’re starting to see the market expand. There’s some anecdotal evidence that we’re taking a fair amount of share from the beer industry.”What we’re seeing in terms of industry trends, particularly on the THC side of this business, has just been phenomenally strong. You’ve had robust medical markets where, by and large, we’re seeing those dominoes start to fall quickly and going recreational. When that happens, the size of the market increases – call it from 2% of the population to as much as 10% of the population. So, from a state regulatory standpoint, having states go form medical to adult use is a huge deal in terms of the market opportunity.
We’re also seeing states get a lot more comfortable with the idea of selling cannabis. I’ve been around for close to seven years in this industry. When I started and I went into a municipality, and I said we wanted to open a cannabis store you’d have people following me to my car with pitchforks. As these municipalities open and public acceptance comes around, people are realizing that these stores are providing jobs and providing a good tax base for communities. So, the acceptance of cannabis has a snowballing effect that just continues to roll.
It’s not just the ultra-frequent users of cannabis who are totally driving the bus in terms of the demand growth for your business. You’re starting to see the market expand. There’s some anecdotal evidence that we’re taking a fair amount of share from the beer industry. So, the fundamentals of this industry are phenomenal. I think that we’re probably in the second inning of what is a mega-trend of legalization of cannabis and the investment opportunity here.
Green: I think one of the interesting things about the fundamentals is you’ve got this hardship of 280E, that all the companies are facing, and yet you still have groups that are surviving, profitable and growing. What are your thoughts on 280E’s effect on cannabis businesses? Do you foresee anything happening there?
Thut: There was a huge liquidity crunch in cannabis in 2019, meaning it was hard for people to come up with capital to grow their businesses. You had a bunch of companies that had licenses who didn’t really know how to operate and weren’t really focused on profitability. That liquidity crunch of 2019 made people get religious about being profitable and being efficient with capital allocation. Fast forward to 2021 and if you look at the top 10 cannabis MSOs in the US, I think we’re all profitable.
So, here you have an industry with accelerating top line growth and they’re already profitable. That profitability should only improve as you’re able to leverage your operating expenses and that’s a unique thing. When the internet craze was started in 1999 you had companies that a weren’t profitable, didn’t have business models, and no one really knew what they wanted to be. You have companies here in cannabis that are growing the top line 50% a year, and they’re profitable, and they’re trading at under 10 times EBITDA, which is totally disjointed.
So, that leads me to your question on to 280E. 280E has been a problem. Banking has been a problem. Having to list our companies over the counter instead of on exchanges like the NASDAQ and NYSE – that’s been a problem in terms of attracting capital. But the good news is Senator Schumer, Senator Booker and others have put out some bold initiatives on what they want to achieve from a legalization standpoint. From an investment standpoint, the biggest thing that investors should be focused on is access to banking, which is included in the senators’ proposed legislation.
Once we get access to banking services, the federal government is basically acknowledging cannabis as an industry will be able to not only have more traditional financing for our growth, but it will also lead to uplift into exchanges and real institutions like the Fidelity’s and the BlackRock’s of the world being able to come and invest in these companies. It also acknowledges 280E is an antiquated law. Getting rid of 280E will give us a much lower tax rate and will allow us to have a bigger proportion of our pretax cash flow into growing our businesses rather than having to go outside for that funding. My crystal ball is probably no better or worse than others in the industry, but if you fast forward 18 months to two years, I have a tough time seeing 280E still in place.
Green: Last question here. What’s the thing you’re most interested in learning about in the cannabis industry?
Thut: I’m just fascinated to see how these various business models will play out. People are placing bets on picks and shovels. People are placing bets on whether being a finished goods manufacturer works. People are placing bets on whether a retailer business model is going to win the day.
If you look at the leadership in the cannabis industry today, it’s totally different than it was four years ago. People that were foregone winners four years ago like MedMen had to do significant recaps. I put Acreage in that sort of bucket too. The leadership had shifted and so I’m really curious to see just from an intellectual standpoint, how this business evolves.
I sometimes scratch my head, you know, do you really want to be a cannabis company with 200 retail locations? You’re going to have a tough time growing same store sales in three to five years in 200 retail locations. So, I’m just most curious in proving out our thesis of being finished goods producers and low cost finished goods producers in the value chain. I’m most curious in seeing how that plays out. I think we are seeing our strategy play out in the most competitive markets in the world. We have a high degree of conviction that we’re on the right track here, but our eyes are always open and we’re always making little pivots here and there trying to make sure to stay on top of the sweet spot in the value curve.
If you describe the cannabis industry generically and you didn’t say cannabis, you said “widget” I think it’s the most fascinating Business School case ever presented. If you’re taking this market that already exists, it’s just illegal. So, all it needs to do is switch from the black market to the legal market and then you’re always trying to plot a course and steer the ship towards where the highest value creation can be. So, I’m fascinated to see how it’s going play out here.
Green: That concludes the interview. Thanks Andrew!
ACS Laboratory, a cannabis and hemp testing lab based outside of Tampa Bay, Florida, announced the launch of their “Tested Safe Certified Seal” program. The program is designed to help raise standards and put more consumer trust in safe, tested products.
ACS Laboratory is an ISO 17025-accredited and DEA-licensed cannabis testing company founded in 2008. Last year they were certified by the Florida Department of Health to perform cannabis testing for state-licensed cannabis companies. In addition, the company acquired Botanica Testing, Inc. in 2020, adding more than 500 hemp and CBD clients to their portfolio. They now perform hemp testing for clients in more than 44 states.
The “Tested Safe Certified Seal” program allows companies to adorn their products with the trademarked seal following testing, informing consumers that their product has met safety standards and a full panel of compliance tests. “Unlike a mandated QR code that links to a Certificate of Analysis (COA) with detailed test results, the Seal shows visual proof at a glance that consumers can trust a brand,” reads the press release.
The program is also endorsed by the American Cannabinoid Association (ACA). “It is exciting to see our industry legally providing cannabis and cannabis-derived products on a commercial scale,” says Matthew Guenther, founder of the ACA. “As with any consumer product, safety and quality control remain our absolute priority.”
To earn the seal, companies send their products to the ACS lab for a full panel of safety and potency tests. ACS has a scope of services that includes: potency testing for 21 cannabinoids, 38 terpene profiles, 42 residual solvents, screening for 105 pesticides, moisture content, water activity, microbiology panels, heavy metals screening, flavonoid testing for 16 profiles, micronutrient testing, mycotoxins, Vitamin E acetate, shelf life & stability, plant regulators (PGRS), PAH testing and Pharmacokinetic Studies (PK) aka human trials.
The NIST is an organization under the U.S. Department of Commerce that promotes innovation through standards, technology and advancing science. The NIST’s CannaQAP platform works with cannabis labs to help improve competence in analytical science and standardization.
The program requires participating labs to conduct exercises that help inform the NIST about current industry standards and capabilities for hemp and cannabis testing. One of the goals of the program is aiding in the design and characterization of cannabis reference materials.
Kaycha Labs took part in two exercises for the CannaQAP study. Exercise 1 included testing for potency with 17 cannabinoids in hemp oil and Exercise 2 included potency, heavy metals and moisture content testing in plant materials.
Chris Martinez, president of Kaycha Labs, says the program can benefit the entire industry when it comes to regulatory compliance testing. “As a leading cannabis lab company with a network of labs in multiple states, it is imperative we demonstrate that our labs apply compliant and consistent testing methodologies,” says Martinez. “Assuring all industry participants, including State and Federal government regulators, that precise and consistent testing data is the norm will benefit the entire industry.”
Kaycha Labs, while based in Fort Lauderdale, actually has cannabis testing labs in California, Colorado, Florida, Massachusetts, Nevada, Oklahoma, Oregon and Tennessee, making them an ideal candidate for CannaQAP.
Exercise 1 has been completed in its entirety and published here. Exercise 2 has completed the participation and data submission legs of the study and NIST is preparing it for publication. On their website, it says that announcements about their upcoming Exercise 3 are coming soon.
Change control, when it comes to quality management systems in manufacturing, processing and producing products such as cannabis edibles or vape pens, is a process where changes to a product or production line are introduced in a controlled and coordinated manner. The purpose of change control process management is to reduce the possibility of unneeded changes disrupting a system, introducing errors or increasing costs unnecessarily.
ASTM International, the international standards development organization, is developing a new standard guide that will cover change control process management for the cannabis and hemp market. The guide is being developed through the D37 cannabis committee.
The WK77590 guide will establish a standardized method for change control process management for cannabis companies so that they can document and track important decisions in manufacturing and quality systems.
For example, an edibles manufacturer would utilize change control process management if they want to use a different type of processing equipment or introduce a new shape or design of their product. Without change control process management, that edibles producer might switch to a new piece of processing equipment without knowing that it requires more energy or uses different raw materials, thus making production unexpectedly more expensive.
While that’s a very cursory example, the premise is simple: Before you undergo a change to your process, plan it out, analyze it, review it, test it out, implement it and make sure it works.
Change control process management can often be summarized in six steps:
Maribel Colón, quality assurance consultant and vice chair of the ASTM subcommittee on cannabis quality management systems, says producers and testing labs will benefit the most from the guide. “As the cannabis industry grows, the quality, expectations, and control challenges grow within,” says Colón. “The creation and implementation of this standard guide will increase cannabis business efficiency and minimize risk, time, and potential cost of poorly managed changes.”
According to a press release, ASTM International is open to collaboration on this as well. Specifically, they are looking for professionals with change control who might be interested in helping advance and develop this guide.
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