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Leaders in Cannabis Formulations: Part 4 – LifeTonic

By Aaron Green
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Russell is the CEO of NES Technology Holdings, a technology development and marketing company that operates Vapor Distilled and LifeTonic Brands. NES Technology Holdings has invented a technology portfolio of more than 160 granted and pending patents that cover inventions across several high-value industries, including cannabis, beverage, fragrance and nutraceuticals. The company is currently in license acquisition diligence processes with 7 of world’s 10 largest fragrance companies and has received a joint venture offer from a $3 billion fragrance company to produce perfumes with its extraction technology. It is also launching ionized cannabis beverage products that provide effects as quickly as alcohol in Nevada and Colorado this fall.

Vapor Distilled invented and commercialized an evaporative extraction process with 40 international patents granted and pending that, along with CO2 extraction, is one of only two fundamentally new extraction processes invented in the last 50 years. Instead of using solvents or hydrocarbons to extract oils from plants, evaporative extraction directly evaporates essential oils from plants and condenses the evaporated compounds into an extract. The process takes less than two seconds to complete and extracts higher levels of volatile terpenes than existing extraction methods. Vapor Distilled has built a fleet of commercial-scale extraction machines and has supplied some of the cannabis industry’s largest brands. The company is currently licensing its evaporative extraction technology within the perfume industry and is marketing an aroma hop extract to replace the dry hopping step when making beer.

LifeTonic invented a drug delivery technology with 56 patents pending and granted, that turns oil-based plant compounds like CBD and THC into electrically charged cannabinoid ions that dissolve completely in water without emulsifiers or additives. When cannabinoids are ionized, absorption is significantly enhanced and their effects can be felt in minutes. The effects of a LifeTonic ionized CBD beverage can be felt by most people in less than 5 minutes, whereas the effects of a LifeTonic ionized THC beverage can be felt by most people in less than 8 minutes. For reference, typical onset times for cannabis beverages are 30 minutes or longer. LifeTonic beverage technology will allow cannabis beverages to work as quickly as alcohol, enabling cannabis to become a social drink.

Russell Thomas, CEO of Vapor Distilled and LifeTonic

We spoke with Russell Thomas, CEO of Vapor Distilled and LifeTonic about his cannabinoid evaporation process and rapid onset beverage technologies. Thomas is a career entrepreneur and inventor with 21 years of experience inventing and protecting intellectual property. Russell’s team has generated more than 160 granted and pending patents. Prior to entering the cannabis industry, Thomas worked in the cleantech industry.

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

Russell Thomas: I came to the cannabis industry from the cleantech industry where I worked on technologies that improved the fuel economy of vehicles. I saw opportunities in the cannabis industry to improve cannabis extraction, which was one of the most important supply chain verticals in cannabis. Every product, from edibles to beverages and vape products, requires a cannabis extract. Any product that needs to be accurately dosed requires an extract. The old way of making edible products with cannabis butter was simply not viable as the industry matured, and most people were rapidly moving away from smoking cannabis and embracing vape products. Even with the entire industry almost completely dependent on extraction, no fundamental innovation was occurring. The primary ways that cannabis was being extracted were chemically intensive. The cleaner methods, such as CO2 extraction, were slow and expensive for terpene recovery. I saw this as a great opportunity to provide a better solution within a primary funnel of the cannabis supply chain.

We commercialized an extraction technology that evaporates cannabinoids directly from plant material in the form of vapor, and then recondenses that vapor back into an essential oil. The entire process takes less than two seconds to complete and preserves fragile terpenes. That technology, called Evaporative Extraction, is the foundation of Vapor Distilled.

Green: What timeframe was that roughly?

Thomas: We capitalized our company in 2015 and began selling wholesale extracts in 2017.

Green: Can you talk more about the evaporative extraction process?

Thomas: Our process works in a similar way to a cannabis vaporizer, but on a massive scale. Our extract is literally recondensed cannabis vapor. In one step, we extract, refine, and activate cannabinoids. On one end, plant material goes in the machine, and on the other end, extract and depleted plant material comes out. Our total extraction time is less than two seconds if you measure the time from when the plant material goes into the extractor and when the extract is condensed.

The LifeTonic logo

A continuous feed of dry plant material is introduced into a heated air stream. The air stream pneumatically conveys the plant material through a series of turbulent, heated evaporation chambers. Upon entering the evaporation chambers, volatile plant compounds are instantaneously distilled from the plant material. A centrifugal separator removes the depleted plant material from the air stream. The air stream is rapidly cooled, causing the volatile plant compounds to condense into an essential oil.

We achieve nearly total activation of THCA to THC simultaneously during extraction and, on average, we extract approximately two to four times more terpenes than a conventional extraction process. The cannabis industry is rampant with exaggeration about terpenes, but we are the only cannabis company negotiating a joint venture with a $3 billion fragrance company to produce perfumes, and I think that says a lot about our process.

Green: Is the extract coming out then as an oil?

Thomas: Our extract comes out of our machines as a fully-activated, high-terpene content, full spectrum oil. Unlike the THC crude that emerges from other processes, our extract requires no further distillation, activation or refinement. You can put it straight into a product.

Green: How about terpene recovery?

Thomas: This is by far what we do best. We excel with the recovery terpenes and volatile compounds from plant material. From day one, we noticed that our evaporative extraction process yields about two to four times more terpenes by mass compared to traditional extraction methods.

While we started as a cannabis company, we recently received a compelling joint venture offer from a $3 billion fragrance company to produce perfume products with our technology. We are also under NDA with 7 of the world’s 10 largest fragrance companies to complete diligence processes to license our extraction technology.

As part of our licensing diligence process, we are performing paid fragrance extraction research for three multi-billion-dollar fragrance companies. Our evaporative extracted fragrance extracts are presenting a broader and more complete range of volatile compounds compared reference samples. We are also seeing substantially improved yield of volatile fragrance compounds. Combined, this gives us the advantage of being able to produce more extract at a lower cost, while also producing a superior product. This combination is how licensees can take market share away from any fragrance company that does not have access to our technology, and it is why we are seeing so much rapid traction in this area.

We have also extracted hops with our technology. If you’ve ever smelled a traditional hops resin, it smells good, but the smell doesn’t fill the room. If you put just a drop of our hops extract on any surface, the entire room will smell strongly of a premium IPA beer. It’s so potent you don’t want to get it on your hands or clothes because you will smell like beer for hours. It’s powerful and wonderful stuff!

Green: What is your business model?

Thomas: At our core, we are a technology development and licensing company. We first identify what we believe to be critical verticals and bottlenecks in high-value industries, then we develop and patent highly differentiated and disruptive technology solutions that we believe exist nowhere else. We then demonstrate both market fit and viability at scale through proof-of-concept sales of branded and high-profile, white-labeled products produced with our unique technologies. Finally, we systematically license and exit the various portions our IP portfolio though the orchestration of highly competitive bidding processes that promote both defensive and strategic acquisitions of our technologies. We are currently at the final phase of our model with licensing our extraction technology, and we are receiving offers as part of a competitive bidding process.

Green: Okay, let’s change gears here and start talking more about LifeTonic and your cannabinoid ionization technology. Can you talk high level about the onset times of cannabinoids in different matrices and media?

Thomas: Through LifeTonic, we invented 56 international patents granted and pending cannabinoid ionization technology that compresses the normal onset time of cannabis beverages from 30 minutes down to just a few minutes. Our cannabinoid ionization technology can also be used as a rapid onset vape alternative when sold in a breath spray format. We are currently selling hemp-based versions of these products through LifeTonic.com, and we are bringing THC versions of these products to market in Nevada and Colorado this fall and winter under the brand name LifeTonic.

All conventional and even nano-emulsified cannabis edibles and beverages take a long time to work. A cannabis chocolate can take 45 minutes to two hours before the effects kick in. Cannabis gummies are faster, but it still takes half an hour to 45 minutes to feel the effects. The very best nano-emulsified cannabis beverages take about a half an hour to work on average, if you are lucky. That long of a time delay effectively eliminates the social aspect of consuming cannabis, so most people instead choose to vaporize or smoke cannabis.

If you look at the largest investments that have been made across cannabis, some of the most prominent have been made by alcohol companies. Constellation Brands invested nearly $4 billion into Canopy Growth, with a mission to find an alternative to alcohol in cannabis. Molson Coors has partnered with Hexo and AB InBev has partnered with Tilray, both with that same mission. Even after all this effort and investment, cannabis beverages represent just a sliver of the market because current cannabis-based beverages take too long to work. The fastest ones on the market, on average, take around a half hour to kick in.

Imagine going to a bar and knowing that every time you got a shot of tequila or a shot of whiskey it’s going to take thirty minutes or more for the effects to even begin to kick in. That would be terrible. That would be the end of social drinking. Unfortunately, that is how a conventional cannabis beverage works.

You can’t really get a social drinking experience with cannabis yet, so most people vape it because it’s fast. But a lot of people don’t want to smoke something; in fact, they don’t want to inhale at all. So, we saw beverages as a huge opportunity. How do we make cannabis beverages work as fast as alcohol? That’s what our ionization technology delivers. From all the people we’ve surveyed – hundreds of people – they say that they reliably feel an onset within about seven to eight minutes with our technology. That is just about as fast as a shot of tequila or whiskey.

“With our partners, we will be featuring LifeTonic beverage products on tap in a cannabis cocktail lounge right off the Las Vegas strip, where social consumption rules are welcoming.”What we’ve done is very different from available nanoemulsion technologies. All those technologies try to mix oil and water, and oil and water don’t mix. In a nanoemulsion, you mix cannabis, a carrier oil, an edible detergent and water, and then you run it all through an ultrasonic homogenizer that breaks the cannabinoids and oil into microscopic droplets suspended in water. There are a lot of styles of nanoemulsions, from spray-dried nanoemulsions to liquid liposomal encapsulations, and they all confer certain absorption benefits when compared to straight-up oil absorption. But still, even the microscopic oil droplets suspended in water are quite large compared to what we have done, and still take quite a long time to digest.

We looked at the cannabis molecule and we said, “You know what? If we can put a strong negative charge on it, if we can ionize it, then we can make it behave more like a dissolvable salt instead of an oil.” When we treat it this way, the cannabis molecule dissolves completely in the water without emulsifiers or additives. When something is dissolved, there is no nano-emulsion droplet size. It is single molecules dissolved water. A single ionized cannabinoid molecule is about 1,000 times smaller than an average nano-emulsion droplet – and this greatly enhances absorption. The onset speed of ionized cannabinoids compared to nanoemulsions is measurable as just a few minutes instead of a half hour or more.

We have 56 granted and pending patents on LifeTonic’s ionization technology. We can ionize THC, CBD, CBG and CBD – most cannabinoids are compatible. There are also several herbal products that are compatible with our ionization technology, like the curcuminoids in turmeric, which are normally very hard to get into water. We can also ionize the eugenol that is in cloves. Ionized eugenol is an intoxicant, so we have big plans for alcohol alternatives outside of cannabis.

We’re using this technology to enter the Nevada cannabis market with one of the largest dispensary chains and cannabis product manufacturers in Nevada. With our partners, we will be featuring LifeTonic beverage products on tap in a cannabis cocktail lounge right off the Las Vegas strip, where social consumption rules are welcoming. We’ll craft every kind of cocktail you can imagine, only without alcohol. All these beverages will work in a matter of minutes to provide the first true social drinking experience with cannabis. After you enjoy a beverage, you may purchase a package of ionized THC beverage powder sachets in the cannabis cocktail lounge or at any of the dispensaries within our distribution network. You can pour the powder into any beverage, and it becomes a friendly, fast-acting THC beverage that will get you high, but not leave you with a hangover. We will also be selling a breath-spray format that works almost as quickly as vaping.

Green: What kind of validation studies have you done?

Thomas: We have conducted several broad market studies for our ionized products and almost all people report a profound onset within a few minutes. We have not completed a formalized clinical trial, but we are closing a major funding round that will allow us to do so. We plan to begin controlled pre-clinical trials focused mainly on ionized CBD because it’s far easier to get FDA approval for clinical trials on CBD than for THC. Our studies will monitor a couple dozen volunteers with a functional MRI and watch the change in the brain using our oral spray and beverage products compared against a standard CBD tincture control. We know that we’re going to see fast action because everybody who uses it says that a feeling develops in minutes.

Green: What geographies are you active in and exploring?

Thomas: CBD and hemp products from our extraction technology have been sold in every US state and parts of Europe. Additionally, hemp-based CBD and CBG versions of our ionized products and ionized turmeric products have been sold in several states through our LifeTonic.com, our ecommerce site. We have also sold white labeled versions of our ionized products through partner brands. We will be launching THC versions of our ionized products with our partners Nevada this fall. We expect THC versions to also be available in Colorado this winter.

Green: So, you are creating the powders on site?

Thomas: Yes. We manufacture ionized CBD, CBG, eugenol and turmeric beverage powders on site. We also manufacture and fast acting ionized sprays. These products are sold through our own retail site and we white label for other brands. Per our long-term licensing strategy, these sales establish market viability through sales. Selling products and establishing market viability prior to licensing significantly increases the value of our licenses and exits. It’s very important to answer the question: Do people buy it and do people love it? So far, we like the feedback!

On the THC side, we manufacture ionized products through partners in each cannabis state that we enter. We manufacture the ionizing base here in Colorado, then we ship it to other states where our partners add the THC and package it in LifeTonic-branded packaging. The analogy is that we sell a proprietary Coca-Cola formula without the caffeine, then our partners add the caffeine and bottle it in Coca-Cola branded bottles. In this way, we ensure that the hardest part of our process is controlled house to ensure consistency and quality across all states. It also allows us to be a non-plant touching business, since we only sold upstream base products that did not contain THC. We pick the best manufacturing and distribution partner in each cannabis state and grow from there.

Green: What’s the one thing you’re most interested in learning about?

Thomas: Increasing the bioavailability of cannabis. I have been most passionate about making cannabis work as quickly as alcohol and giving people an alternative to inhaling it through smoking or vaping. That’s definitely what we’ve been most excited about as a company.

Green: Okay, great. That concludes the interview!

Thomas: Thank you Aaron!

FDA Issues Warnings on Delta-8 THC Products

By Cannabis Industry Journal Staff
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On September 14, the FDA published a consumer update on their website, seeking to educate the public and offer a public health warning on delta-8 tetrahydrocannabinol, otherwise known as delta-8 THC.

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.

FDAlogoDue 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’s consumer update included this picture at the top of the page

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 chemical structure of Delta 8 THC.

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.

WeedMaps Acquires Sprout

By Cannabis Industry Journal Staff
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The WeedMaps parent company, WM Technology, Inc., announced this week that they have acquired Sprout, a cloud-based CRM and marketing platform in the cannabis industry. Sprout’s CRM software is used by dispensaries, distributors and cultivators in 28 different states and offers a variety of marketing services like text marketing, email marketing, coupons, surveys and more.

The Sprout Messenger software was launched back in April of this year and at the time was touted as a gamechanger in marketing technology, allowing companies to interact with their customers via email, text and their in-house chat in two-way chats.

WM Technology, Inc. was originally founded in 2008. Based in Irvine, California, the company’s business-to-consumer platform, WeedMaps, is known as a go-to resource for consumers seeking cannabis retailers. The app and website now offer online ordering, brand listings, product information and consumer education.

On the business-to-business side, WM Technology, Inc. has grown to include WM Business, a cloud-based SaaS solutions platform with offerings like point of sale, logistics, wholesale and ordering solutions software.

The acquisition of Sprout will help the WM Technology team grow their WM Business portfolio to offer more software solutions, according to Chris Beals, CEO and chairman of WM Technology, Inc. “Our strategy focuses on establishing WM Business as the software solution of choice for cannabis businesses,” says Beals. “With the addition of Sprout, we are one step closer to realizing this vision of providing an all-in-one seamless and integrated solution to run, manage, and grow one’s cannabis business. This acquisition will allow our clients to better target, reach, acquire and retain customers at scale.”

WM Technology, Inc. did not disclose the financial details of the acquisition yet.

2021 Cannabis Labs Virtual Conference: September Program

By Cannabis Industry Journal Staff
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2021 Cannabis Labs Virtual Conference: September Program

Click here to watch the recording

Agenda

Hemp & Delta-8 in the United States: The Evolution of the Hemp Testing Market

  • Charles Deibel, President & CEO, Deibel Labs, Inc.

In this session, Charles Deibel discusses the current state of affairs across the country with respect to hemp testing. This includes a look at hemp testing rules at the state and federal level. He also provides an in-depth analysis on delta-8 THC and the controversy surrounding this cannabinoid, how to analyze samples of it and why the market has exploded around this product.

TechTalk: Hardy Diagnostics

  • Jessa Youngblood, Food & Beverage Marketing Coordinator, Cannabis Industry Specialist, Hardy Diagnostics

ISO 17025 Accreditation is NOT the Golden Ticket

  • Kathleen May, Founder & Owner, Triskele Quality Solutions

This presentation discusses where the standard falls short, how poor lab practices may negatively impact the consumer and how poor or insufficient lab practices could result in regulatory action, including product recalls, fines, and loss of licenses.

TechTalk: ANAB

  • Melanie Ross, Technical Products Developer, ANSI National Accreditation Board (ANAB)

TechTalk: Columbia Labs

  • Kelly O’Connor, Sales Director Key Accounts, Columbia Labs

Pesticides in Hemp: Challenges and Solutions

  • Grace Bandong, Business Unit Manger for Contaminants, Eurofins Food Chemistry Testing (EFCT)

This presentation takes a deep dive into understanding the requirements for pesticide testing, approaches to analysis and responding to regulatory requirements with extremely low LOQs.

TechTalk: Perkin Elmer

  • Tim Cooper, Sr. Manager, Software Development, PerkinElmer

This presentation provides an overview of how standards are developed and used, how Official Methods for cannabis are developed as well as training opportunities and proficiency testing.

What to Expect When Opening a Lab in a New State

  • Michael Kahn, Founder & CEO, MCR Labs

Kahn explores the lab’s role int he cannabis industry, the importance of knowing and understand state regulations and lessons for growing your lab while maintaining quality.

Click here to watch the recording

Organizations Submit Comments on CAOA

By Cannabis Industry Journal Staff
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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.

Sen. Schumer unveiling the Cannabis Administration and Opportunity Act

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.

To learn more, take a look at the draft legislation in its entirety here.

Leaders in Cannabis Formulations: Part 3 – RealSleep

By Aaron Green
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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, co-founder and partner of OpenNest Labs and RealSleep.

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!

Kamins: Thanks, Aaron.

Flower-Side Chats Part 9: A Q&A with Andrew Thut, Chief Investment Officer of 4Front Ventures

By Aaron Green
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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.

Andrew Thut, Chief Investment Officer of 4Front Ventures

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.

Sen. Schumer unveiling the Cannabis Administration and Opportunity Act

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!

Thut: Thanks Aaron.

Current Trends in Banking for Cannabis-Related Businesses

By Paula Durham, CFE, CCCE
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Cannabis is still federally illegal and is included on Schedule 1 of the Controlled Substances Act (CSA), along with such other substances as heroin, fentanyl and methamphetamines.1 It is a federal crime to grow, possess or sell cannabis.

Despite being federally illegal, 36 U.S. states and the District of Columbia have legalized the sale and use of cannabis for medical and/or adult use purposes,2 and both direct and indirect cannabis-related businesses (CRBs) are growing at a rapid rate. Revenue from medical and adult use cannabis sales in the US in 2019 is estimated to have reached $10.6B-$13B and is on track to reach nearly $37B in 2024.3

Because the sale of cannabis is federally illegal, financial institutions face a dilemma when deciding to provide services to CRBs. Should they take a significant legal risk or stay out of the market and miss out on a significant revenue opportunity? So far, the vast majority of financial institutions have been unwilling to take the risk, resulting in a dearth of options for CRB’s. Until recently, cannabis business operators had few options for financial services, but times are changing.

This piece will discuss current trends in banking for cannabis-related businesses. We will cover differences in legality at state and federal levels, complexities in dealing in cash versus digital currencies, Congressional actions impacting banking and CRBs and how banking is changing. The explosion of state legalization of cannabis over the past several years has had a strong ripple effect across the US economy, touching many industries both directly and indirectly. Understanding the implications of doing business with a CRB is both challenging and necessary.

Feds Versus States

Money laundering is the process used to conceal the existence, illegal source or illegal application of funds.4 In 1986 Congress enacted the Money Laundering Control Act (MLCA), which makes it a federal crime to engage in certain financial and monetary transactions with the proceeds of “specified unlawful activity.”5 Therefore, CRB transactions are technically illegal transactions under the MLCA.

Financial institutions therefore face a risk of violating the MLCA if they choose to do business with CRBs, even in states where cannabis operations are permitted. In addition, financial institutions could also face criminal liability under the Bank Secrecy Act (BSA) for failing to identify or report financial transactions that involve the proceeds of cannabis businesses operating legally under state law.6

Federal authorities continued to aggressively enforce federal cannabis laws

In short, because cannabis is illegal at the federal level, processing funds derived from CRBs could be considered aiding and abetting criminal activity or money laundering. States, however, began legalizing cannabis in 1996, and by 2009, thirteen states had laws allowing cannabis possession and use.7 Despite this legislation, federal authorities continued to aggressively enforce federal cannabis laws.8 That changed under the Obama administration when, shortly after being elected, President Obama stated that his administration would not target legal CRB’s who were abiding by state laws.[9] In an attempt to provide clarity in this murky environment, beginning in 2009, the Department of Justice (DOJ) issued three memos designed to guide federal prosecutors in this area. However, none of the DOJ memos issued from 2009 through 2013 addressed potential financial crime related to the legal sale or distribution of cannabis in states allowing the use of medicinal or recreational cannabis.

To assist financial institutions in navigating potential financial crime implications of banking CRBs, the Financial Crimes Enforcement Network (FinCen) issued guidance in 2014 that clarified how financial institutions could conduct business with CRBs and maintain compliance with their Bank Secrecy Act requirements (2014 Guidance).9 According to the 2014 Guidance, financial institutions may choose to interact with CRBs based on factors specific to each institution, including the institution’s business objectives, the evaluated risks associated with offering such services, and its ability to manage those risks effectively.

The 2014 Guidance requires those who choose to provide services to CRBs to design and implement a thorough customer due diligence review that includes, in part, analyzing the licensing of the entity, developing an understanding of the business operations of the entity, and ongoing monitoring of the entity.9 In addition, financial institutions are required to file a Suspicious Activity Report (SAR) for every transaction they process for a CRB, should they choose to accept the business.

Although the 2014 Guidance does outline a path for financial institutions to engage with CRBs, it does not change federal law and, therefore, does not eliminate the legal risk to financial institutions.10 By its very nature, the 2014 Guidance was a temporary fix, subject to changing views of different administrations, evidenced by the fact that all three of the DOJ guidance documents noted above were rescinded by then Attorney General Jeff Sessions on January 4, 2018.12 The DOJ enforcement posture could change once again in a Biden administration. Biden is on record as favoring decriminalization, and Attorney General candidate Merrick Garland has stated that if confirmed he will deprioritize enforcement of low-level cannabis crimes. Garland also believes using limited government resources to pursue prosecution of cannabis crimes states where cannabis is legal does not make sense.12

Because of the uncertainty and high risk, most banks remain unwilling to serve CRBs. Those that do serve CRBs charge exorbitant fees (fees of $750-$1,000 or more per account per month are not uncommon), pricing many smaller operators out of the financial services market.

Cash is King – Or Is It?

Cannabis operators have discovered the old adage “cash is king” is not necessarily true when it comes to the cannabis space. Bank-less CRBs are forced to utilize cash to pay business expenses, which can be particularly difficult. Utility companies, payroll companies, and taxing authorities are just some of the providers that are difficult, if not impossible, to pay in cash. For example, cannabis operators have been turned away from IRS offices when attempting to pay large federal tax obligations in cash. Likewise, cannabis operators have been unable to utilize payroll processing companies to administer payroll and benefits for their businesses because the processors won’t take cash. CRBs can’t use Amazon or other online retailers because online providers cannot accept cash.

Because dealing in cash is so difficult, CRB operators look for workarounds such as using personal credit/debit cards to purchase business equipment and supplies. This doesn’t eliminate the cash problem, however, because the credit card holder will likely have to accept cash as reimbursement. Such transactions could be considered an attempt to hide the source of the cash, which is, by definition, money laundering.

CRBs often have large sums of money onsite

Some bank-less CRBs try to skirt the system by obtaining bank accounts in the name of management companies or other entities one step removed from the actual business. While operators often choose this route in an effort to streamline business and operate out of the shadows, it again runs afoul of banking laws. Transferring cannabis related financial transactions to another entity is actually the very definition of money laundering – which, as noted above, is defined as the process used to conceal the existence or source of “illegal” funds.

In addition to the difficulties in making payments or purchasing business supplies, operating in a cash-heavy environment poses significant safety risks for cannabis operators. CRBs often have large sums of money onsite and transport large sums of cash when purchasing product or paying bills, making them a target for robbery. In 2017, there was a spate of dispensary robberies across the Phoenix Metro area, including one at Bloom Dispensary that took place during operating hours.13

Managing all that cash increases the cost of doing business as well, in the form of increased labor, insurance, and security costs. Cash must be counted and double counted, which can be time consuming for staff, not to mention the time it takes to deliver physical cash payments to hither and yon. Ironically, lack of banking significantly decreases transparency and clouds the waters of compliance, as operating strictly in cash makes it easier to manipulate reported financial results.

Potential Congressional Solutions

In recent years Congress has undertaken several efforts to pass legislation designed to address the state/federal divide on cannabis, which would likely clear the way for financial institutions to provide services to CRBs, including:

  • R. 1595 – Secure and Fair Enforcement Banking Act of 2019 (“SAFE Act”);
  • 1028 & H.R. 2093 – Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act); and
  • 2227 – Marijuana Opportunity Reinvestment and Expungement Act of 2019 (MORE Act).

The climate in Washington DC, however, did not allow any of these initiatives to pass both houses of congress. Had any been sent to the White House, President Trump was unlikely to sign them into law.

The cannabis industry has new reason to believe reform is on the horizon with shift in political leadership in the White House and Senate. Newly anointed Senate Majority Leader Chuck Schumer recently committed to making federal cannabis reform a priority, and President Biden appears committed to decriminalization, reviving the hope of passage of one of these pieces of legislation.

The Changing Banking Landscape

Even though there is little in the way of formal protections for financial institutions, and with the timeline for a legislative fix unknown, an increasing number of banks are working with cannabis operators.

According to FinCen statistics, there were approximately 695 financial institutions actively involved with CRBs as of June 30, 2020. It is important to note that these statistics are based on SAR filings, which banks are required to file when an account or transaction is suspected of being affiliated with a cannabis business. However, some of these SARs may have been generated on genuine suspicious activity rather than on a transaction with a known cannabis customer.

Number of Depository Institutions Actively Banking
Cannabis-Related Businesses in the United States
(Reported in SARS)14

There are arguably more banking institutions offering services to CRBs than ever before. The challenges for CRBs are (1) finding an institution that is willing to offer services; (2) building/maintaining a compliance regime that will be acceptable to that institution; and (3) cost, given the high fees associated with these types of accounts. 

How CRBs Get Accepted by Banks

The gap between CRBs’ need for banking and the financial services providers’ sparse and expensive offerings to the sector has created an opportunity for third-party firms to intervene and provide a compliance structure that will satisfy the needs of the financial institutions, making it easier for the CRB to find a bank.

These third-party firms perform extensive BSA-compliant due diligence on applicants to ensure potential customers are following FinCen guidance required to receive banking services. After the completion of due diligence, they connect the CRBs with financial institutions that are willing to do business with CRBs and provide checking/savings accounts, check writing capability, and merchant processor accounts. These firms often provide additional services such as armored car and cash vaulting services. Some of these firms also offer vendor screening, pre-approving vendors before any payments can be made.

One such firm, Safe Harbor Private Banking, started as a project implemented by the CEO of Partners Credit Union in Denver, Colorado, who set out to design a cannabis banking program that would allow Partners to do business with Colorado CRBs.15 The program was successful and has since expanded into other states who have legalized cannabis. Other operators include Dama Financial and NaturePay.

While these services offer hope for many CRBs, the downside is cost. These services perform the operations necessary to find, open, and maintain a compliant bank account; however, the costs of compliance are still high, pricing some small operators out of the market.

Is Digital Currency an Answer?

 Digital currency is also making its way into the cannabis world. Digital currency, or cryptocurrency, is a medium of exchange that utilizes a decentralized ledger to record transactions, otherwise known as a blockchain. One of the largest benefits of blockchain is that it is a secure, incorruptible digital ledger used for, among other things, financial transactions.16 Blockchain technology offers CRBs a transparent and immutable audit trail for business and financial transactions. Several cannabis-specific cryptocurrencies have sprung up in the past several years, including PotCoin, CannabisCoin, and DopeCoin, to name a few.

In July 2019, Arizona approved cryptocurrency startup ALTA to offer services to the state’s medical cannabis operators.17 ALTA describes itself as a “digital payment club where cash-intensive businesses pay each other using digital tokens instead of cash.”18 ALTA members purchase digital tokens that are used to pay other members using a proprietary blockchain based system. The tokens are redeemable for US dollars at a stable rate of 1:1, and CRBs do not need a bank account to participate in the ALTA program.

ALTA proposes to pick up members’ cash and exchanges it for tokens, which are then used to pay other members for goods and services. Tokens may be redeemed for cash at any time.18 The company has been approved by the Arizona State Attorney General, and one of the first members they hope to enlist is the Arizona Department of Revenue (ADOR). Enlisting ADOR into the program would allow dispensary members to pay state taxes digitally rather than hauling large amounts of cash to ADOR offices.

Similarly, Nevada recently contracted with Multichain Ventures to supply a digital currency solution to the Nevada cannabis industry. Nevada Assembly Bill 466 requires the state create a pilot program to design a “closed loop” system like Venmo in an effort to reduce cash transactions in the cannabis sector. Like ALTA, Nevada’s proposed system will convert cash to tokens which can then be transacted between system participants.19

While both proposals are promising for Arizona and Nevada CRBs, the timeline as to when, or if, these offerings will come online is unknown. Action on cannabis reform at the federal level may render these options moot.

Looking to the Future

Although states are legalizing cannabis in one form or another in growing numbers, the fact that cannabis is still federally illegal poses a significant barrier to accessing the financial services market for CRBs. While most banks are still reluctant to offer services to this rapidly growing industry, there are more banks than ever before willing to participate in the cannabis industry. Recent changes in leadership in Washington DC offer a positive outlook for cannabis reform at the federal level.

As the “green rush” continues to envelop the country, financial services options available to CRBs are slowly growing. Many new options are now available to help CRBs find a bank, develop compliance programs, and manage the cash related problems encountered by most CRBs. However, these solutions may be out of reach for the budget-conscious small operator. Also, there are a number of cryptocurrency solutions designed specifically for CRBs; however, when, or if, these solutions will gain significant traction is still unknown.

References

  1. Controlled Substances Act, 21 U.S.C., Subchapter I, Part B, §812.
  2. “State Marijuana Laws”; National Conference of State Legislatures, February 19, 2021.
  3. “Exclusive: US Retail Marijuana Sales On Pace to Rise 40% in 2020, near $37B by 2024”. Marijuana Business Daily, June 30, 2020.
  4. Kaufman, Irving. “The Cash Connection: Organized Crime, Financial Institutions, and Money Laundering”. Interim Report to the President, October 1984.
  5. S. Code § 1956 – Laundering of Monetary Instruments.
  6. Rowe, Robert. “Compliance and the Cannabis Conundrum.” ABA Banking Journal, September 11, 2016.
  7. “History of Marijuana as a Medicine – 2900 BC to Present”. ProCon.org, December 4, 2020.
  8. Truble, Sarah and Kasai, Nathan. “The Past – and Future – of Federal Marijuana Enforcement”. org, May 12, 2017.
  9. FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses.
  10. Cannabis Banking Coalition Statement.
  11. Sessions, Jefferson B. “Memorandum for All United States Attorneys”. January 4, 2018.
  12. “Attorney General Nominee Garland Signals Friendlier Marijuana Stance”. Marijuana Business Daily, February 22, 2021.
  13. Stern, Ray. “Robbers Hitting Phoenix Medical Marijuana Dispensaries: Is Bank Reform Needed?” The Phoenix New Times, April 11, 2017.
  14. FinCen Marijuana Banking Update, June 30, 2020.
  15. Mandelbaum, Robb. “Where Pot Entrepreneurs Go When the Banks Just Say No.” The New York Times, January 4, 2018.
  16. Rosic, Ameer. “What is Blockchain Technology? A Step-by-Step Guide for Beginners.” com, 2016.
  17. Emem, Mark. “Marijuana Stablecoin Asked to Play in Arizona Fintech Sandbox.” CCN.com, October 25, 2019.
  18. http:\\Whatisalta.com\
  19. Wagner, Michael, CFA. “Multichain Ventures Secures Public Sector Contract with Nevada to Supply Tokenized Financial Ecosystem for the Legal Cannabis Industry”, January 26, 2021.

AOAC Approves Two New Microbiological Assays

By Cannabis Industry Journal Staff
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On August 11, PathogenDx announced that they received an AOAC Performance Tested Methods Certificate for their QuantX total yeast and mold test. Six days later, on August 17, Medicinal Genomics announced that AOAC approved their PathoSEEK 5-Color Aspergillus Multiplex Assays under the same AOAC Performance Tested Methods program.

Both assays are specifically designed with cannabis and hemp testing in mind and designed to expedite and simplify microbiological testing. PathogenDx’s QuantX quantifies the total amount of yeast and mold in a sample while also measuring against safety standards.

In addition to the total yeast and mold count test, PathogenDx has also introduced a 96-well plate, improved sample preparation and new data reporting with a custom reporting portal for compliance testing.

The Medicinal Genomics platform can detect four species, including A. flavus, A. fumigatus, A. niger, and A. terreus in both flower and infused edibles. The PathoSEEK microbial testing platform uses a PCR-based assay and provides an internal plant DNA control for every reaction.

This technique verifies the performance of the assay when detecting pathogens, allegedly minimizing false negative results commonly due to set up errors and experimental conditions.

AOAC International is a standards organization that works in the cannabis testing space through their CASP program to evaluate and approve standard testing methods for the industry.

Reducing Cross Contamination in Your Lab

By Nathan Libbey
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Cross Contamination

Cross Contamination – noun – “inadvertent transfer of bacteria or other contaminants from one surface, substance, etc., to another especially because of unsanitary handling procedures. – (Mariam Webster, 2021). Cross contamination is not a new concept in the clinical and food lab industries; many facilities have significant design aspects as well as SOPs to deliver the least amount of contaminants into the lab setting. For cannabis labs, however, often the exponential growth leads to a circumstance where the lab simply isn’t large enough for the number of samples processed and number of analytical instruments and personnel needed to process them. Cross contamination for cannabis labs can mean delayed results, heightened occurrences of false positives, and ultimately lost customers – why would you pay for analysis of your clean product in a dirty facility? The following steps can save you the headaches associated with cross contamination:

Wash (and dry) your hands properly

Flash back to early pandemic times when the Tik Tok “Ghen Co Vy” hand washing song was the hotness – we had little to no idea that the disease would be fueled mostly by aerosol transmission, but the premise is the same, good hand hygiene is good to reduce cross contamination. Hands are often the source of bacteria, both resident (here for the long haul; attached to your hands) and transient (easy to remove; just passing through), as they come into contact with surfaces from the bathroom to the pipettor daily (Robinson et al, 2016). Glove use coupled with adequate hand washing are good practices to reduce cross contamination from personnel to a product sample. Additionally, the type of hand drying technique can reduce the microbial load on the bathroom floors and, subsequently tracked into the lab. A 2013 study demonstrated almost double the contamination from air blade technology versus using a paper towel to dry your hands (Margas et al, 2013).

Design Your Lab for Separation

Microbes are migratory. In fact, E. coli can travel at speeds up to 15 body lengths per second. Compared to the fastest Olympians running the 4X100m relay, with an average speed of 35 feet per second or 6 body lengths, this bacterium is a gold medal winner, but we don’t want that in the lab setting (Milo and Phillips, 2021). New lab design keeps this idea of bacterial travel in mind, but for those labs without a new build, steps can be made to prevent contamination:

  • Try to keep traffic flow moving in one direction. Retracing steps can lead to contamination of a previous work station
  • Use separate equipment (e.g. cabinets, pipettes) for each process/step
  • Separate pre- and post-pcr areas
  • Physical separation – use different rooms, add walls, partitions, etc.

Establish, Train and Adhere to SOPs

Design SOPs that include everything- from hygiene to test procedures and sanitation.

High turnover for personnel in labs causes myriad issues. It doesn’t take long for a lab that is buttoned up with cohesive workflows to become a willy-nilly hodgepodge of poor lab practices. A lack of codified Standard Operating Procedures (SOPs) can lead to a lab rife with contaminants and no clear way to troubleshoot the issue. Labs should design strict SOPs that include everything from hand hygiene to test procedures and sanitation. Written SOPs, according to the WHO, should be available at all work stations in their most recent version in order to reduce biased results from testing (WHO, 2009). These SOPs should be relayed to each new employee and training on updated SOPs should be conducted on an ongoing basis. According to Sutton, 2010, laboratory SOPs can be broken down into the following categories:

  • Quality requirements
  • Media
  • Cultures
  • Equipment
  • Training
  • Sample handling
  • Lab operations
  • Testing methodology
  • Data handling/reporting/archiving
  • Investigations

Establish Controls and Monitor Results

Scanning electron micrograph shows a colony of Salmonella typhimurium bacteria. Photo courtesy of CDC, Janice Haney Carr
Scanning electron micrograph shows a colony of Salmonella typhimurium bacteria. Photo courtesy of CDC, Janice Haney Carr

It may be difficult for labs to keep tabs on positivity and fail rates, but these are important aspects of a QC regimen. For microbiological analysis, labs should use an internal positive control to validate that 1) the method is working properly and 2) positives are a result of target analytes found in the target matrix, not an internal lab contamination strain. Positive controls can be an organism of choice, such as Salmonella Tranoroa, and can be tagged with a marker, such as Green Fluorescent Protein in order to differentiate the control strain. These controls will allow a lab tech to discriminate between a naturally contaminated specimen vs. a positive as a result of cross-contamination.

Labs should, in addition to having good QC practices, keep track of fail rates and positivity rates. This can be done as total lab results by analysis, but also can be broken down into customers. For instance, a lab fail rate for pesticides averages 4% for dried flower samples. If, during a given period of review, this rate jumps past 6% or falls below 2%, their may be an issue with instrumentation, personnel or the product itself. Once contamination is ruled out, labs can then present evidence of spikes in fail rates to growers who can then remediate in their own facilities. These efforts in concert will inherently drive down fail rates, increase lab capacity and efficiency, and result in cost savings for all parties associated.

Continuous Improvement is the Key

Cannabis testing labs are, compared to their food and clinical counterparts, relatively new. The lack of consistent state and federal regulation coupled with unfathomable growth each year, means many labs have been in the “build the plane as you fly” mode. As the lab environment matures, simple QC, SOP and hygiene changes can make an incremental differences and drive improvements for labs as well as growers and manufacturers they support. Lab management can, and should, take steps to reduce cross contamination, increase efficiency and lower costs; The first step is always the hardest, but continuous improvement cannot begin until it has been taken.

References

Margas, E, Maguire, E, Berland, C. R, Welander, F, & Holah, J. T. (2013). Assessment of the environmental microbiological cross contamination following hand drying with paper hand towels or an air blade dryer. Journal of Applied Microbiology, 115(2), 572-582.

Mariam Webster (2021. Cross contamination. Retrieved from https://www.merriam-webster.com/dictionary/cross%20contamination

Milo, M., and Phillips, R. (2021). How fast do cells move? Cell biology by the numbers. Retrieved from http://book.bionumbers.org/how-fast-do-cells-move/

Robinson, Andrew L, Lee, Hyun Jung, Kwon, Junehee, Todd, Ewen, Perez Rodriguez, Fernando, & Ryu, Dojin. (2016). Adequate Hand Washing and Glove Use Are Necessary To Reduce Cross-Contamination from Hands with High Bacterial Loads. Journal of Food Protection, 79(2), 304–308. https://doi.org/10.4315/0362-028X.JFP-15-342

Sutton, Scott. (2010). The importance of a strong SOP system in the QC microbiology lab. Journal of GXP Compliance, 14(2), 44.

World Health Organization. (2009). Good Laboratory Practice Handbook. Retrieved from https://www.who.int/tdr/publications/documents/glp-handbook.pdf