In doing so, it opened the door to an industry that many experts agree could exceed $7 billion annually, once the market is fully established. That’s potential the cannabis market hasn’t seen since Washington became the first Pacific state to legalize adult use cannabis, almost 10 years ago (followed shortly after by Colorado, then Oregon in 2014 and California in 2016).
Unfortunately, the leaders of this great country have yet to follow suit, and cannabis remains illegal at the federal level. For those in the cannabis market, this means that state-licensed cannabis businesses must cultivate and sell their products within the confines of the state in which they are licensed. Nothing can cross state lines. Even if a business is licensed in both Vermont and New York, it can’t ship product from one state to the other without running afoul of federal legislation. Most in the East Coast cannabis market view this as a negative.
Virginia became the first state in the South to legalize adult use cannabis
While it certainly makes things more difficult, a small group of forward-thinking investors and entrepreneurs see this for what it really is: an opportunity to get in on the ground floor and establish state-specific grow operations and other supply-chain waypoints, where none or few currently exist. Think of the current state of the East Coast cannabis market as a beachhead. Right now, the industry is defined by state lines. But when the federal government finally legalizes adult use cannabis from coast to coast—and it’s only a matter of time before it does—those state lines will essentially disappear. When they do, the beachheads established now will become the infrastructure for the entire Eastern seaboard.
Take Virginia, for example. It shares its border with five states that have legalized medical cannabis but have yet to cross the bridge into adult use sales (West Virginia, Maryland, Kentucky, Tennessee and North Carolina). A Virginia-based grow operation built now has the potential to serve not just those five states but other contiguous markets including Pennsylvania, Ohio, South Carolina, and even Alabama, Georgia and Indiana. A relatively small investment now could pay huge dividends in just a few years, when the market literally blows wide open.
It’s this incredible potential that makes the rise of the East Coast cannabis market one of the most important developments in the last five years. And while the potential scale of grow operations and other cannabis businesses is certainly essential to the conversation, let’s not forget that “niche products” within the East Coast cannabis market are still very much up for grabs.
If the past decade has taught us anything, it’s that consumers are willing to pay a premium for high-quality, organically grown cannabis. Both new and long-time cannabis enthusiasts will choose — even demand — high-quality, organically grown cannabis that looks, smells and tastes fresh and doesn’t rely on harmful fertilizers, heavy metals or pesticides. They’re also enthusiastic about supporting brands that have a commitment to sustainable, eco-friendly operations.
The demand for high-quality, organically grown cannabis continues to increase
It’s very much like the current trends we see in the grocery store aisles. Manufacturers and consumers alike are seeing the value of “whole foods.” After decades of relying on heavily processed fare, both suppliers and end-users are benefiting from higher-quality ingredients. Consumers want to know what’s in the stuff they’re putting into their bodies. When it comes to cannabis, they want to know that what they’re taking to alleviate their anxiety doesn’t include harmful chemicals. This demand has the capacity to push revenue even higher.
And when the dam finally breaks and businesses can ship product from state to state, the idea is for growers to be well-positioned geographically to become suppliers of high-quality, organically grown cannabis, for every state east of the Mississippi.
Cannabis businesses in states such as Colorado have had the past decade to prepare for the coming boom, but that doesn’t mean it’s too late to join the party. The rise of the East Coast market parallels what Colorado and the other Pacific states experienced in the early-to-mid teens—the potential to become a very real industry, with huge capacity for growth and profit. Get in on that action now!
The East Coast cannabis market—and, indeed, the entire U.S. market—also sits on the verge of another game-changing trend: following in the footsteps of other markets and realizing sooner rather than later that high-quality, organically grown, eco-friendly cannabis is the next stage of the game. Few investors and entrepreneurs see that right now, but the astute businessperson can capitalize on both trends now and position themselves and their businesses for huge returns in the very near future. The rise of the East Coast cannabis market makes that a very real possibility.
Update: On April 21, 2021, Virginia Governor Ralph Northam signed the legislation into law, making Virginia the first state int he American South to legalize adult use cannabis.
On April 7, 2021, legislators in Virginia finally came to an agreement for their adult use cannabis legalization plan. Back in February of this year, lawmakers passed a bill to legalize adult use cannabis with a launch date of 2024, but Governor Ralph Northam wanted to move quicker than that.
Virginia Governor Ralph Northam Image: Craig, Flickr
Last week, Gov. Northam issued a number of amendments to the legalization bills (Senate Bill 1406 and House Bill 2312) that essentially tapers the time frame of legalization to July of this year. With the legislature approving those amendments yesterday, the state of Virginia has now finalized their legalization plans, setting in motion the launch of the very first legal adult use cannabis market in the American South.
Beginning July 1, 2021, Virginia will allow adults to possess up to an ounce of cannabis and up to four plants per household. The commercial cannabis market, and the regulatory framework accompanying it, will be set to legalize sales July 1, 2024.
The bill establishes the Virginia Cannabis Control Authority as the regulatory body overseeing the legal cannabis market. A five-member Board of Directors in that agency will develop and issue regulations and licenses. According to the bill, the Board can set the number of licenses, with a maximum of 400 retailers, 25 wholesalers, 450 cultivators and 60 manufacturers, aside from any medical cannabis and hemp processing license already issued. The Board is also in charge of licensing testing labs.
Vertical integration is not permitted under Virginia’s new legalization plan, but all of the medical cannabis licensees in the state are already vertically integrated. According to the bill, they can keep their vertical integration for a small fee of $1 million and after they submit a diversity, equity and inclusion plan.
In addition to Virginia’s normal 6% sales tax, a state tax of 21% is added to retail sales of adult use cannabis, excluding medical dispensaries. Local municipalities are allowed to issue up to 3% in additional taxes.
In a press release sent out this morning, a new coalition announced their launch to “end the prohibition, criminalization, and overregulation of cannabis in the United States.” The Cannabis Freedom Alliance (CFA) says their core values include federal descheduling, criminal justice reform, “reentry and successful second chances,” promoting entrepreneurship in free markets and reasonable tax rates.
Who’s Behind the CFA?
The organizations that founded the CFA are Americans for Prosperity (AFP), Mission Green/The Weldon Project, the Reason Foundation, and the Global Alliance for Cannabis Commerce (GACC). Take a look at that list and see if you recognize the names. AFP is a well-known conservative and libertarian political lobbying group founded and funded by the Koch brothers. The Reason Foundation, another Libertarian think-tank and an advocate for prison privatization, also listed the Koch brothers as some of their largest donors in disclosures filed in 2012.
The Koch family business, Koch industries, makes hundreds of billions of dollars a year in the oil and gas industry and has held massive political influence for decades. They regularly donate hundreds of millions of dollars to Republican campaigns. Historically, they’ve played a major role in opposing climate change legislation. They’re widely known as conservative advocates for lower corporate taxes, less social services and deregulation.
Interestingly enough, prominent criminal justice reform advocate Weldon Angelos and rapper Snoop Dogg appear to have joined forces with the Koch-backed group, CFA, following a Zoom meeting where Charles Koch told them he thinks all drugs should be legalized, according to Politico. “We can’t cut with one scissor blade. We need Republicans in order to pass [a legalization bill],” Angelos told Politico. The tie between cannabis legalization and traditional Republican and Libertarian values is obvious: their free market, personal liberties and small government ideology fits well within the legalization movement.
Big Oil, Alcohol and Tobacco, Oh My!
The Coalition for Cannabis Policy, Education and Regulation (CPEAR) is a group that was founded in March 2021. Two of the founding members are Altria, the company that makes Marlboro cigarettes, and Molson Coors, a multinational alcohol company. The CPEAR website says that they want to work on responsible federal reform. “We represent a vast group of stakeholders — from public safety to social equity — focused on establishing a responsible and equitable federal regulatory framework for cannabis in the United States.”
Founding members of CPEAR also include: The Brink’s, a private security firm, the National Association of Convenience Stores, the Council of Insurance Agents & Brokers and the Convenience Distribution Association. In other words, the group is made up of large and powerful corporate interest groups that represent the alcohol, tobacco, insurance and security industries.
Both NORML and the Drug Policy Alliance (DPA) have spoken out against CPEAR. Erik Altieri, executive director of NORML, says it’s a matter of corporate interests coming in and working to change laws for their companies to capitalize on legalization. “We’ve seen how big corporate money and influence have corrupted and corroded many other industries,” says Altieri. “We can’t let the legal marijuana industry become their next payday.”
The DPA also released a statement opposing CPEAR. Kassandra Frederique, executive director of the DPA, says that she urges caution to elected officials in taking counsel from these corporate powers. “We have long been concerned about the entry of large commercial interests into the legal marijuana market,” says Frederique. “Big Alcohol and Tobacco have an abysmal track record of using predatory tactics to sell their products and build their brands – often targeting low-income communities of color and fighting public health regulations that would protect people.”
While their motives and desired outcomes remain unclear, it is apparent that we’re reaching a new age in the cannabis legalization movement, one where powerful corporations outside of the cannabis space want in. Whether its oil and gas, insurance, security, tobacco or alcohol, these groups are using their power and money to influence cannabis policy reform.
Update: Governor Michelle Lujan Grisham signed the bill into law on April 12, 2021, making New Mexico the fifth state to legalize cannabis via the legislature.
On March 31, 2021, legislators in New Mexico reached an agreement on SB2/HB2, a bill that legalizes adult use cannabis. The bill now heads to Governor Michelle Lujan Grisham’s desk, where she is expected to sign it.
Following the conclusion of the regular legislative session, the New Mexico House and Senate reconvened for a special session to finalize the cannabis legalization deal at the governor’s request.
New Mexico Governor Michelle Lujan Grisham
The Cannabis Regulation Act (SB2/HB2) decriminalizes possession for adults over 21 and sets up a regulatory framework for licensing, commercial production and sales by April 1, 2022 (a year from now).
According to AP News, the New Mexico bill gives the governor’s office a lot of power in licensing the industry and “monitoring supplies.” That includes the power to appoint a superintendent of the Regulation and Licensing Department, which is in charge of regulatory oversight in the new market.
The Cannabis Regulation Act sets up an excise tax on adult use sales of 12% that rises to 18% over time, in addition to the “current gross receipts on sales that range from 5% to 9%.” The bill also removes taxes on medical sales.
The cannabis industry is quickly growing with the chance of sales tripling to $30 billion by 2023. With many rules and regulations that business owners must follow, marketing your cannabis business can be a challenge. While many may not know where to start with marketing, there are organic and simple tactics that owners can implement that can help drive more traffic to your website, resulting in more leads and sales.
Digital marketing is the most effective way to improve your brand’s online presence, reach your target audiences, rank higher on Google searches and ultimately drive more sales. Today, 81% of people turn to the internet before making a purchasing decision, but determining what digital marketing efforts are most valuable can be a daunting task for business owners. When looking to implement digital marketing strategies, businesses should leverage the 80/20 rule—focusing efforts on the 20% of the digital marketing tactics that yield 80% of the most impactful results. With this in mind, some of the key digital marketing tactics to implement today include:
Keep up with Reputation Management
This dispensary ad appeared on Variety.com
Having positive reviews for your company is key to having customers come back, and for new customers to try your business out. With 72% of customers not making a buying decision until they’ve read reviews, companies should prioritize soliciting for reviews from customers and stay up to date on the reviews that are coming in. Businesses should respond to all reviews, whether good or bad, as this shows to customers that the brand cares and values the customers opinion and feedback and wants to continue creating a positive experience for everyone. Reviews should be shown prominently on the business’s website for customers to clearly read and can also be used in emails or social media posts.
Make Search Engine Optimization (SEO) Top of Mind
Focusing on developing a solid SEO strategy ensures that customers can find your company on Google when they are searching. In оrdеr to rank well in search engine results, websites need search engine optimization (SEO), which is a powerful tool and a must if your company wants to be found online by customers. With Google processing 12.18 billion search queries in July 2020 alone and 93% of all online experiences beginning with a search engine, making sure your business can be clearly found and seen online is imperative for your cannabis business’ success. Keeping your website and basic information—such as hours, contact information and prices—up to date will keep your SEO high.
PlugPlay, a California cannabis brand, stays relevant with creative posts like these.
Gathering customer emails is KEY and your business should have a solid plan on how to capture them, whether that’s an incentive for providing an email when they enter the site or one at checkout in the retail shop. Businesses should have the customer’s name, phone and email as a baseline to use to email or text blast out the latest promotions. From there, companies can also create a loyalty program for customers in order to give them an incentive to keep purchasing from your business. By creating targeted and personal messaging to customers with the help of CRM tools, loyalty is created to the brand, which can increase purchasing power and the amount spent.
Embrace Social Media
Social media is a part of almost everyone’s life and it’s the perfect opportunity to give customers an inside view into your company, the products you sell and any promotions or specials going on. Utilizing Facebook, Instagram and Twitter is essential for directly reaching your customer base with visually appealing and timely content. Social media is an opportunity to get personal with your brand and build relationships with your customers for them to see what kind of brand you are. Social pages should remain up to date and should be keeping up with the comments that followers are saying.
As more dispensaries and cannabis businesses pop up across the country, marketing your business may seem like a challenge for business owners, but simple and useful digital marketing tools can be incorporated into the business plan to create more quality leads and sales. Ensuring you have a strong digital presence for customers to find you and learn about your business online is the key to success.
The bill establishes the Office of Cannabis Management, which will launch and manage the regulatory system for the commercial cannabis market in New York.
According to Steve Schain, senior attorney at Hoban Law Group, the Office of Cannabis Management will have a five-member board that will oversee not just the adult use cannabis market, but also medical cannabis as well as the state’s hemp market. For the medical market, the new legislation provides for more patient caregivers, home cultivation and an expanded list of qualifying conditions.
New York Governor Andrew Cuomo Image: Chris Rank, Flickr
Troy Smit, deputy director of the New York NORML chapter, says the bill might not be perfect, but it’s a massive win for the cannabis community. “It’s taken a great amount of work and perseverance by activists, patients, and consumers, to go from being the cannabis arrest capital of the world, to lead the world with a legalized market dedicated to equity, diversity, and inclusion,” says Smith. “This might not be the perfect piece of legislation, but today, cannabis consumers can hold their heads high and smell the flowers.”
The MRTA sets up a two-tier licensing structure that separates growing and processing licenses from dispensary licenses. The bill includes a social equity aspect that requires 50% of the licenses to be awarded to, “minority or women-owned business enterprise, service-disabled veterans or distressed farmers,” says Schain.
New York City Image: Rodrigo Paredes, Flickr
Melissa Moore, New York State director of the Drug Policy Alliance, says she’s proud of the social equity plan the bill puts in place. “Let’s be clear — the Marijuana Regulation and Taxation Act is an outright victory for the communities hit hardest by the failed war on drugs,” says Moore. “By placing community reinvestment, social equity, and justice front and center, this law is the new gold standard for reform efforts nationwide. Today we celebrate, tomorrow we work hard to make sure this law is implemented fairly and justly for all New Yorkers.”
Schain says the new tax structure in the bill shifts to the retail level, with a 9% excise tax and 4%-of-the-retail-price local excise tax (split 25%/75% between the respective counties and municipalities). Revenue from cannabis taxes will enter a fund where 40% will go to education, 40% to community grants reinvestment fund and 20% to drug treatment and public education fund.
It appears that businesses already established in New York’s medical market get a head start on the new adult use market, while other businesses enter the license application process, according to Schain. “Although the existing Medical Marijuana licensees should be able to immediately to sell Adult-Use Cannabis, it will take up to two years for the New York’s Adult Use Program to launch and open sales to the public,” says Schain.
The cannabis industry saw close to $15.5B in deals across VC, private equity, M&A and IPOs in 2020 according to PitchBook data. Early and growth stage capital has been a key enabler in deal activity as companies seek to innovate and scale, taking advantage of trends towards national legalization and consolidation. Entourage Effect Capital is one of the largest VC firms in cannabis with over $150MM deployed since its inception in 2014. Some of their notable investments include GTI, CANN, Harborside (CNQ: HBOR), Acreage Holdings, Ebbu, TerrAscend and Sunderstorm.
We spoke with Matt Hawkins, co-founder and managing partner at Entourage Effect Capital. Matt started Entourage in 2014 after exiting his previous company. He has 20+ years of private equity experience and serves on the Boards of numerous cannabis companies. Matt’s thought leadership has been on Fox Business in the past and he has also recently featured on CNBC, Bloomberg, Yahoo! Finance, Cheddar and more.
Aaron Green: How did you get involved in the cannabis industry?
Matt Hawkins: We’ve been making investments in the cannabis industry since 2014. We’ve made 65 investments to date. We have a full team of investment professionals, and we invest up and down the value chain of the industry.
I had been in private equity for 25 years and I kind of just fell into the industry after I’d had an exit. I started lending to warehouse owners in Denver that were looking to refinance their mortgages out of commercial debt into private debt, which would then give them the ability to lease their facilities to growers. I realized there would be a significant opportunity to place capital in the private equity side of the cannabis business. So, I just started raising money for that project and I haven’t looked back. It’s been a great run and we’ve built a fantastic portfolio. We look forward to continuing to deploy capital up to and through legalization.
Green: Do you consider Entourage Effect Capital a VC fund or private equity firm? How do you talk about yourself?
Hawkins: In the early stages of the industry, we were more purely venture capital because there was hardly any revenue. We’re probably still considered a venture capital firm, by definition, just because of the risk factors. As the industry has matured, the investments we make are going to be larger. The reality is that the checks we write now will go to companies that have a track record of not only 12 months of revenue, but EBITDA as well. We can calculate a multiple on those, and that makes it more like lower/middle-market private equity investing.
Green: What’s your investment mandate?
Matt Hawkins, Co-Founder and Managing Partner at Entourage Effect Capital
Hawkins: From here forward our mandate is to build scale in as many verticals as we can ahead of legalization. In the early days, we were focused on giving high net worth individuals and family offices access to the industry using a very diversified approach, meaning we invested up and down the value chain. We’ll continue to do that, but now we’re going to be really laser focused on combining companies and building scale within companies to where they’re going to be more attractive for exit partners upon legalization.
Green: Are there any particular segments of the industry that you focus on whether it’s cultivation, extraction or MSOs?
Hawkins: We tend to focus on everything above cultivation. We feel like cultivation by itself is a commodity, but when vertically integrated, for example with a single-state operator or multi-state operator, that makes it intrinsically more valuable. When you look at the value chain, right after cultivation is where we start to get involved.
Green: Are you also doing investments in tech and e-commerce?
Hawkins: We’ve made some investments in supply chain, management software, ERP solutions, things like that. We’re not really focused on e-commerce with the exception of the only CBD company we are invested in.
Green: How does Entourage’s investment philosophy differ from other VC and private equity firms in cannabis?
Hawkins: We really don’t pay attention to other people’s philosophies. We have co-invested with others in the past and will continue to do so. There’s not a lot of us in the industry, so it’s good that we all work together. Until legalization occurs, or institutional capital comes into play, we’re really the only game in town. So, it behooves us all to have good working relationships.
Green: Across the states, there’s a variety of markets in various stages of development. Do you tend to prefer investing in more sophisticated markets? Say California or Colorado where they’ve been legalized for longer, or are you looking more at new growth opportunities like New York and New Jersey?
Hawkins: Historically, we’ve focused on the most populous states. California is obviously where we’ve placed a lot of bets going forward. We’ll continue to build out our portfolio in California, but we will also exploit the other large population states like New Jersey, New York, Arizona, Massachusetts, Michigan, Ohio and Illinois. All of those are big targets for us.
Green: Do you think legalization will happen this Congress?
Hawkins: My personal opinion is that it will not happen this year. It could be the latter part of next year or the year after. I think there’s just too much wood to chop. I was encouraged to see the SAFE Banking Act reappear. I think that will hopefully encourage institutional capital to take another look at the game, especially with the NASDAQ and the New York Stock Exchange open up. So that’s a positive.
I think with the election of President Biden and with the Senate runoffs in Georgia going Democrat, the timeline to legalization has sped up, but I don’t think it’s an overnight situation. I certainly don’t think it’ll be easy to start crossing state lines immediately, either.
Green: Can you explain more about your thoughts on interstate commerce?
Hawkins: I think it’s pretty simple. The states don’t want to give up all the tax revenue that they get from their cultivation companies that are in the state. For example, if you allow Mexico and Colombia to start importing product, we can’t compete with that cost structure. States that are neighbors to California, but need to grow indoors which is more expensive, are not going to want to lose their tax revenues either. So, I just think there’s going to be a lot of butting heads at the state level.
The federal government is going to have to outline what the tax implications will be, because at the end of the day the industry is currently taxed as high as it ever will be or should be. Anything North of current tax levels will prohibit businesses from thriving further, effectively meaning not being able to tamp down the illicit market. One of the biggest goals of legalization in my opinion should be reducing the tax burden on the companies and thereby allowing them to be able to compete more directly with the illicit market, which obviously has all the benefits of reduced crime, etc.
Green: Do you foresee 280E changes coming in the future?
Hawkins: For sure. If the federal illegality veil is removed – which means there’ll be some type of rescheduling – cannabis would be removed from the 280E category. I think 280E by definition is about just illegal drugs and manufacturing and selling of that. As long as cannabis isn’t part of that, then it won’t be subject to it.
Green: What have been some of the winners in your portfolio in terms of successful exits?
Hawkins: When the CSC started allowing companies in Canada to own U.S. assets, the whole landscape changed. We were fortunate to be early investors in Acreage and companies that sold to Curaleaf and GTI before they were public. We are big investors in TerrAscend. We were early investors in Ebbu which sold to Canopy Growth. Those were huge wins for us in Fund I. We also have some interesting plays in Fund II that are on the precipice of having similar-type exits.
You read about the big ones, but at the end of the day, the ones that kind of fall under the radar – the private deals – actually have even greater multiples than what we see on some of the public M&A activity.
Green: Governor Cuomo has been hinting recently at being “very close” on a deal for opening up the cannabis market in New York. What do you think are the biggest opportunities in New York right now?
Hawkins: If it can get done, that’s great. I’m just concerned that distractions in the state house right now in New York may get in the way of progress there. But if it doesn’t, and it is able to come to fruition, then there isn’t a sector that doesn’t have a chance to thrive and thrive extremely well in the state of New York.
Green: Looking at other markets, Curaleaf recently announced a big investment in Europe. How do you look at Europe in general as an investment opportunity?
Hawkins: We have a pretty interesting play in Europe right now through a company called Relief Europe. It’s poised to be one of the first entrants to Germany. We think it could be a big win for us. But let’s face it, Europe is still a little behind, in fact, a lot behind the United States in terms of where they are as an industry. Most of the capital that we’re going to be deploying is going to be done domestically in advance of legalization.
Green: What industry trends are you seeing in the year ahead?“We’re constantly learning from other industries that are steps ahead of us to figure out how to use those lessons as we continue to invest in cannabis.”
Hawkins: Well, I think you’ll see a lot of consolidation and a lot of ramping up in advance of legalization. I think that’s going to apply in all sectors. I just don’t see a scenario wherein mom and pops or smaller players are going to be successful exit partners with some of the new capital that’s coming in. They’re going to have to get to a point where they’re either selling to somebody bigger than them right now or joining forces with companies around the same size as them and creating mass. That’s the only way you’re going to compete with companies coming in with billions of dollars to deploy.
Green: How do you see this shaking out?
Hawkins: That’s where you start to look into the crystal ball. It’s really difficult to say because I think until we get to where we truly have a national footprint of brands, which would require crossing state lines, it’s going be really difficult to tell where things go. I do know that liquor, tobacco, beer, the distribution companies, they all are standing in line. Big Pharma, big CPG, nutraceuticals, they all want access to this, too.
In some form or fashion, these bigger players will dictate how they want to go about attacking the market on their own. So, that part remains to be seen. We’ll just have to wait and see where this goes and how quickly it goes there.
Green: Are you looking at other geographies to deploy capital such as APAC or Latin America regions?
Hawkins: Not at this point. It’s not a focus at all. What recently transpired here in the elections just really makes us want to focus here and generate positive returns for investors.
Green: As cannabis goes more and more mainstream, federal legalization is maybe more likely. How do you think the institutional investor scene is evolving around that? And is it a good thing to bring in new capital to the cannabis market?
Hawkins: I don’t see a downside to it. Some people are saying that it could damage the collegial and cottage-like nature of the industry. At the end of the day, if you’ve got tens of billions of dollars that are waiting to pour into companies listed on the CSC and up-listing to the NASDAQ or New York Stock Exchange, that’s only going to increase their market caps and give them more cash to acquire other companies. The trickle-down effect of that will be so great to the industry that I just don’t know how you can look the other way and say we don’t want it.
Green: Last question: What’s got your attention these days? What’s the thing you’re most interested in learning about?
Hawkins: We’re constantly learning about just where this industry is headed. We’re constantly learning from other industries that are steps ahead of us to figure out how to use those lessons as we continue to invest in cannabis. We all saw the correlation between cannabis and alcohol prohibition. The reality is that the industry is mature enough now where you can see similarities to industries that have gone from infancy to their adolescent years. That’s kind of where we are now and so we spend a lot of time studying industries that have been down this path before and see what lessons we can apply here.
Green: Okay, great. So that concludes the interview!
By Seth Mailhot, Steve Levine, Emily Lyons, Leah Kaiser, Marshall Custer No Comments
The U.S. Food and Drug Administration (FDA) issued warning letters this month to two companies concerning the marketing and sale of over-the-counter (OTC) drug products containing cannabidiol (CBD) as an inactive ingredient. The letters allege violations of the Federal Food, Drug, and Cosmetic (FD&C) Act related to current good manufacturing practice requirements and marketing of new drugs without FDA approval.
At issue: labeling, NDAs and active ingredients
The companies subject to the warning letters market OTC drug products that contain CBD as an inactive ingredient. In the warning letters, the FDA states that it has not approved any OTC drugs containing CBD. According to the FDA, an approved new drug application (NDA) is required to legally market nonprescription or OTC drug products containing CBD, regardless of whether the CBD is an active or inactive ingredient. The FDA notes that CBD has known pharmacological effects and demonstrated risks, and that CBD has not been shown to be safe and suitable for use, even as an inactive ingredient. As a result, the FDA states that CBD cannot be marketed in OTC drug products.
Further, the warning letters noted the marketing of several CBD products that highlighted the benefits of CBD for a range of conditions in such a manner that, according to the FDA, “misleadingly suggests that [their] . . . products are approved or endorsed by FDA in some way when this is not true.” The FDA also took issue with the way products were labeled, which included callouts on the front label regarding the CBD content of the product (a requirement under most state laws that permit CBD as an ingredient). Similarly, the FDA also noted that some of the products advertised CBD as an active ingredient in a topical pain reliever product. According to the FDA, no company may legally market such a product, since there are no OTC monographs or NDAs that allow the use of CBD in an OTC drug.
What this means for you
These warning letters highlight the FDA’s vigilance regarding OTC CBD products. Regardless of whether the CBD is labeled as an active or inactive ingredient, the FDA has taken the position that nonprescription CBD drugs are in violation of the FD&C Act. Companies marketing CBD products should be careful to ensure their marketing practices, as well as their product formulations, do not present a heightened risk of FDA enforcement.
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 in order to navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.
Large-scale agricultural practices can take a toll on soil health leading to inefficiencies over the long term. Harvey’s All Naturals is a Colorado-based company specializing in premium farm-to-table full spectrum CBD products. Harvey’s gets all of its hemp from Boot Ranch Farms, an off-grid sustainable hemp farm in Southern Colorado supplied by an artesian well.
We spoke with Harvey Craig, CEO Harvey’s All Naturals and co-founder of Boot Ranch Farms, to learn more about the benefits of regenerative agriculture, how he thinks about soil health, and how they produce their CBD products. Harvey started Boot Ranch Farms in 2014 after the passing of the Farm Bill and Harvey’s All Naturals followed shortly thereafter.
Aaron Green: How did you get involved in the cannabis and hemp industry?
Harvey Craig: I got involved at a very young age, as the youngest of eight kids, seven of which are boys, I was introduced to cannabis on the marijuana side first. As an engineer through the years, I’ve always been involved in creating very efficient growing systems for cannabis.
Harvey Craig, CEO Harvey’s All Naturals and co-founder of Boot Ranch Farms
In the early 2000s, I learned about CBD a little bit through experimenting with marijuana strains to help a friend who had Parkinson’s and also through the research performed by Raphael Mechoulem, an organic chemist and professor at the Hebrew University of Jerusalem in Israel. In 2014, when the Farm Bill made hemp legal, I dropped everything and went into it because I felt “this is what I need to be doing.”
Green: What is sustainable farming mean to you?
Craig: Sustainable farming to me means putting soil health and responsible natural growing practices at the forefront of all agriculture – regenerative processes for soil, in a nutshell. To me, soil health is one of the biggest problems in the United States right now. By regenerating and making our soils living, healthy and with a rich nutrient base we create an ecosystem that is good for human health and health all around.
Green: What do you mean specifically when you say, “soil health?”
Craig: Soil is living. A good natural soil has a living microbiotic structure inside it. There’s a living habitat that forms inside our soil over the years. Large scale agriculture in many cases has depleted or killed this living structure through readily accessible fertilizers and tilling practices.
Farmers understand the soil. There are practices we can undertake that are helping our living soils and helping the microbiotic habitat to thrive. Practices such as no-till technologies, rotating crops, using cover crops, not being a monocrop, responsible water use, healthy fertilizer and pesticide technologies, minimal processing, the list goes on and on…
When we talk about this thing called sustainability, I think it’s very important that we understand there are two sides of cannabis. There’s the marijuana and then there’s the hemp. We can’t put those two together – they’re governed very differently. Hemp became legal through the Farm Bill and is governed by the Department of Agriculture. Hemp is just like any other crop out there really. That means we can mix hemp in with other crops. It’s very much like corn and other crops in how it’s grown on a large scale, industrial basis.
Marijuana on the other hand is governed by each state’s regulatory commission. Those regulations make it very hard to mix in with general agriculture. So, when it comes to the marijuana side, unfortunately, it must be a monocrop. Most marijuana is grown in pots and pots are fine. However, if you are just growing in a pot and then throwing your soil away, that is not very sustainable. As it sits right now, in the marijuana industry there is really no sustainability, unfortunately. The energy use for the lights in indoor grows, for example, creates a huge carbon footprint and load on the electrical grid. I’m not trying to put indoor growing down, but that’s the way it is. The only way I foresee sustainability in the marijuana side of cannabis is to let loose a little bit on regulation and allow it to become a part of normal agricultural processes.
Green: What is it about tilling that degrades the soil quality?
Craig: When we till our soil, we’re turning the organisms in the soil up and we’re allowing the sun to dry them out. If it’s not done properly, you kill that soil structure.
Now, these little microorganisms in our soil create a healthy soil, but it doesn’t happen instantly, this takes years to create. Nobody has the time anymore, everybody’s “go go go” and “make it happen instantly”. So that gets destroyed. Now we have all these dead soils that everybody’s growing in and growers turn to factory-produced fertilizers with readily available nutrients.
When we are talking about cannabis, we can’t just look at monocropping. If you grow one crop in the same soil over and over, the soil is going to get depleted. One of the main things that we deplete is nitrogen and growing other crops, such as clover, can replenish that nitrogen. Growing cover crops protects the soil from the sun, creates nitrogen for the soil, and holds the water within the soil.
Instead of tilling, you can rotate with crops like root vegetables, radishes and other things that have deep root structures. Instead of tearing them up, just let them degrade organically and go back into the soil. Those deep root structures will also help aerate the soil.
Green: What is a farmer’s first approach?
Craig: Farmers want their land to be healthy. True farmers have a oneness with the earth and understand the earth. The farmer’s first approach keeps the farmer involved in creating new technologies for agriculture.
Green: Let’s say you’re a farmer that has land or recently acquired land that’s been industrially grown upon. How would you take that land and start fresh with a regenerative process?
Craig: The first thing you have to do is take soil samples and send them to a lab. That’ll tell you what you’re working with. Also, knowing a little history about the land helps as well. Was it used for grazing? Was it used for growing corn? What was it used for? Were organic practices used?
Then, there are many things you can do to start to regenerate your soil, but it takes time. In many situations, people don’t want to take that time. But what we’re learning is, the people and the farmers that do take that time often take a hit monetarily for the first two or three years. After that, once that structure is maintained, the natural health of the soil can be replenished. Crops will grow better, and they won’t spend as much money on fertilizers and pesticides in the long run because the microbiotic structure in the soil is creating a healthy ecosystem. When we destroy that ecosystem, it doesn’t come back easily or quickly. If there’s a little bit there, it can be regenerated with the right practices.
Green: I understand that the Boot Ranch is an off-the-grid farm. What was your motivation for either going off-grid or remaining off-grid?
Craig: I have a background in alternative energies and engineering, and when creating Boot Ranch Farms there was a lot that went into the sustainability side of it. The farm is extremely far away from the power grid for starters. So, an investment in solar for electricity was money well spent. My thought process was, why would I invest in bringing the wires in when I could actually save money and resources by creating a very efficient solar system and not be tied to the grid? Our farm is self-sustaining without being connected to any grid, which is one of the main reasons for remaining off-grid.
Green: I understand the farm is supplied by an artesian well. How do you monitor your water quality?
Craig: Well, we’re very fortunate. Existing natural water quality is one of the main reasons we decided to grow in the San Luis Valley. When you’re starting something new, you have to look at your financial side of things. Investing in a hemp farm is very different than the marijuana side because you won’t make as much money per pound of product sold. So, you have to watch your budget and not spend too much, or you’re never going to make a profit.
The self-sustaining artisanal well and water rights were existing on the property. There’s no pumping required for it and the water goes into a 10,000-gallon holding tank, where we can monitor and test for water quality. In order to water our plants, we use a pump/drip water system that supplies water to each individual plant. It’s very efficient compared to most watering systems out there, such as flood irrigation or pivots, and really doesn’t use a heck of a lot of water.
Green: Are you growing in open air or greenhouses?
Craig: We grow in two 3,000 square feet industrial-grade greenhouses at Boot Ranch Farms. Greenhouse One has all the bells and whistles including heating, cooling, light deprivation, supplemental lighting, automated controls and more. That greenhouse allows us to mimic Mother Nature a little bit. We can get up to six harvests throughout the course of the year in that greenhouse. However, in reality, we get about four.
In addition, we have a second greenhouse that is set about 100 feet away and set up to keep plants growing on mother nature’s cycle. We can move groups of mature plants to Greenhouse One after each harvest for multiple flowering cycles. Lastly, between greenhouses, we have a 10,000 square foot courtyard that’s protected with shade cloth and other things to help protect those plants from the elements. In late October, all remaining plants in both greenhouses and the courtyard become mature and ready to harvest due to shorter days created by mother nature.
Green: Do you insure your crops?
Craig: We have not. Hemp is a new industry and we have not found good crop insurance.
Green: Do you cultivate your own genetics?
Craig: We work with some other companies here in Colorado to provide genetics. Consistent genetics are extremely important on the hemp side because we need to trust that they are going to keep the THC levels down. On the marijuana side, that part doesn’t matter so much
There are different strains that have been created that I absolutely love, and I’ve tried to stick with them and stay with that seed stock. One of them is called The Wife and the other Cherry Wine. Most of the best hemp I have found is based upon the Cherry strain. People are always looking for high CBD. I’d rather have a lower CBD level in the 8% to 12% range. Something higher in the 14% to 20% range has a higher chance of producing a product with more than the legal amount of THC.
Green: Is Harvey’s All Naturals fully supplied by Boot Ranch Farms?
Craig: Yes, it is. There are a lot of things that go into a quality product and we focus on that at Boot Ranch. We’re small, not trying to compete with the large-scale market. Unfortunately, a high percentage of the products out on the market come from large-scale industrial hemp grows. We focus on long-term medicinal value and grow very high-quality hemp and we try not to degrade it in any way, shape or form throughout processing.
Green: How many square feet or acres is the Boot Ranch Farm?
Craig: Boot Ranch farm is about 260 acres. We only grow on less than three of it.
Green: What’s your extraction process?
Craig: We use cold alcohol extraction. We do not distill to separate our alcohol from the hemp oil. We use what’s called a roto vape. That cold processing preserves our terpenes, it preserves our full-spectrum cannabis oil profile and doesn’t fully decarboxylate our CBDa. We want a large CBDa percentage because there are many things that CBDa is good for when it comes to long term medicinal reasons.
Green: Are you processing your own hemp?
Craig: No, we sub that part of it out. What I’ve learned in this industry is three main parts: 1- the farming; 2- the extraction, and; 3- the product line. Those are three very separate processes and require specialized expertise within themselves. Each is a large investment and it’s very hard to do it all. I decided to work with other people on the extraction part of it. They have the expertise, and we pay them well to do what they do.
Green: Okay, great. And then any final words for Ag Day?
Craig: Support your small farmer in nutrient-rich agricultural products.
Green: Great. That concludes the interview, Harvey!
The unusual nature of 2020 gave rise to a reciprocally roller-coaster-like cannabis market. Cannabis was cemented officially as an essential industry with the rise of COVID-19, and November elections resulted in even more United States markets welcoming medical and adult-use sales.
The stagnant cannabis stock market of 2019 became a thing of the past by the end of 2020. Throughout the course of last year, bag holders anxiously watched cannabis options creep back up. Now, nearly two years since market decline in 2019, the cannabis stock market is exploding with blank checks and buyout fever. Much of this expectant purchasing is due to Canadian companies considering U.S. market entrance. Combined with the recent surge in the use of special purpose acquisition companies (SPACs) to invest, this has led to an increase in asset prices.
A SPAC is defined as “a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.” Though they have existed for decades, SPACs have become popular on Wall Street the last few years because they are a way for a company to go public without the associated headaches of preparing for a traditional IPO.
In a SPAC, investors interested in a specific industry pool their money together without knowledge of the company they’re starting. The SPAC then goes public as a shell company and begins acquiring other companies in the associated industry. Selling to a SPAC is usually an attractive option for owners of smaller companies built from private equity funds.
The U.S.-Canadian market questions that this rising practice asks are: Can Canadian companies enter a bigger market and be more successful? Is it advisable for U.S. companies to sell their assets to Canadian corporations whose records may be marred by a history of losses and a lack of proper corporate governance? Regardless — if both SPAC’s and Canadian bailout money is here, what comes next?
What is Driving this Bull Market?
Underpinning these movements are record cannabis sales internationally, making last year’s $15 billion dollars’ worth of sales in the U.S. look small in comparison. New markets have opened up in various states and countries throughout 2020, and that trend is only expected to continue. New demographics are opening up, especially among older age groups. This makes sense, as most cannabis sales — even in a recreational setting — are people treating something that ails them like insomnia or aches and pains.
Cannabis is set to take off, and we are entering only the second phase of its market expansion. The world is becoming competitive. Well-run companies that are profitable in key markets are prime targets for bigger, growing companies. At the same time, the world of SPACs will continue to drive valuations. Irrespective of buying assets, growing infrastructure is and will continue to be greatly needed.
The Elusive Profitability Factor
When Canada blew up, one of the biggest changes was companies began focusing the year on cost cutting and — most importantly — profitability. Profitability became the buzzword. But bigger companies are on the search for already-profitable enterprises, not just those that have the potential to be. However, profitability is currently still unobtainable in Canada. Reasonable forecasters should expect this year will show a few companies getting bailed out while many others will be forced to either merge for survival or declare bankruptcy.
An ideal company’s finances should highlight not only revenue growth, but also profitability. Attention should be focused on how well businesses are run, and not on how much money they have the potential to raise or spend. Over the years, there have been many prospective companies that spent hundreds of millions only to barely operate, and are now shells in litigation. Throwing money at any deal should have been a lesson learned in the past, but SPACs are tempting because they are trendily associated with new, interesting management styles and charismatic businesspeople.
Companies should be able to present perfect and clear financials along with maintenance logs for all equipment. In today’s day and age, books must be stellar and clean. As money pours into SPACs, asset valuations for all qualities of companies will rise. The focus instead becomes about asset plays, which will cause assets to continue rising as money is poured into SPACs.
Once upon a time, if number counters presented a negative review or had to dig too much, executives would turn a cold shoulder on investment. But in the age of SPACs, these standards of evaluation will be greatly undervalued. Aging equipment and reportability of every piece of equipment may or may not be properly serviced and recorded in a fast-moving market. Costs of repair or replacing equipment that isn’t properly maintained may be a problem of the past. Because when money comes fast, none care for the gritty details.
Issues for SPACs
Shortage of talent and training has become a big concern already in the era of SPACs. How many quality assets are out there? Big operators in the U.S. are content and don’t see Canada as an enticing market to enter. So, asset buys are likely to primarily be in the U.S. Large companies like Aphria may buy out some of the major American players, but most Canadian companies will use new funding rounds to pay down debts. Accordingly, they will then be forced to piece together smaller operators as a strategy.
A cannabis company’s personnel and office culture are very important when looking to integrate into a larger corporate culture. Remember, it’s not just the brick and mortar that is being invested into, it is also the people that run a facility. Maintaining employee retention when a deal occurs is always critical. Your personnel should be highly trained and professional if you want to exit. Easy to plug-in corporate structures make all the difference in immediately gaining from the sale or having to retool the shed and bring in all new people.
The rise of the SPAC-era and Canadian entry into the U.S. market will cause asset increases, but it is only the second chapter in the market expansion of cannabis. Proper buys will nail profitability, impeccable books, proper maintenance records and will have created an efficient corporate structure with talented personnel. The rest will be overpriced land buys that will require massive infrastructure spending. The basics of a well-run organization don’t change. The cannabis market is going to ROAR, but don’t worry if the SPACs pass you by- they are buying at the start of cannabis only.
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