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A Q&A with Matt Hawkins, Co-Founder & Managing Partner at Entourage Effect Capital

By Aaron Green
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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!

Hawkins: Thanks, Aaron.

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Reduce Environmental Impact of Cannabinoid Production Through Biosynthesis

By Maxim Mikheev
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Cannabinoids—the molecules found in the cannabis plant—are becoming an immensely popular industry, with applications in pharmaceuticals, food and beverage, cosmetics and more. However, the traditional method of harvesting cannabinoids through plants has a tremendous environmental footprint, with the energy-intensive practices required to produce the cannabis plant costing the U.S. billions of dollars each year 

Fortunately, new innovations have emerged that will make this process require significantly less time, energy and natural resources. This article will explore two methods of rare cannabinoid production—the traditional method of cultivation through plants and the newer method of biosynthesis—and will compare their impact on the environment. 

Natural Cultivation

The companies that use the traditional process of growth, harvest, extraction and purification have a major problem when it comes to harvesting rare cannabinoids. Rare cannabinoids only show up in trace amounts in plants, which means you need to grow vast quantities of plants to harvest just a tiny amount of rare cannabinoids.

Once you factor in the amount of plants that need to be grown, equipment, fuel, fertilizers, water, man hours, harvesting, extraction and purification, the costs are economically unfeasible. This process uses so much energy, natural resources, water and fertilizers that the end product is not affordable for the majority of consumers.

Cultivation through plants requires hundreds of acres of land, thousands of pounds of fertilizer, thousands of gallons of water and thousands of man hours. In addition, this process uses significant amounts of energy to run equipment, in addition to extraction and purification. Plus, the end products can contain contaminants and toxins due to heavy metals, pesticides, pests, mold and more.

Biosynthesis

Biosynthesis is the production of a desired compound through the natural means of an organism’s biological processes. It produces identical compounds to those found in nature, lending itself as the optimal pathway for the manufacture of cannabinoids identical to their naturally occurring counterparts. ​

While cultivation through plants is harmful to the environment, biosynthesis produces a much lower environmental footprint because it requires significantly fewer resources. Biosynthesis requires over 90% less energy, natural resources and man hours, along with zero fertilizers, contaminants and toxins. There also no extraction and purification costs.

Biosynthesis needs only 6,000 square feet to produce the same amount of rare cannabinoids as hundreds of acres of plants. This process produces pharmaceutical-grade, organic, non-GMO products at a 70-90% lower cost than cultivation through plants—resulting in cannabinoid products that are more affordable for the consumer.

With climate change increasingly becoming a concern, it’s crucial for us to rely on more environmentally friendly avenues for cannabinoid production. Biosynthesis provides a method of cannabinoid production that requires significantly less time, energy and natural resources than cultivation through plants—resulting in not only a decreased environmental footprint but also safer and less expensive products.

Flower-Side Chats Part 1: A Q&A with Sam Ghods, CEO of Connected

By Aaron Green
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Flower continues to be the dominant product category in US cannabis sales. 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 navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.

Connected is a vertically-integrated cannabis company based out of Sacramento, CA and one of the most sought-after brands in California and Arizona. Having formed as a legacy operation in 2009, Connected has created a cult-like following over more than a decade in business. According to BDS Analytics, Connected Cannabis and their acquired brand Alien Labs now boasts the highest wholesale flower price in any major legal market – their average indoor flower wholesale price is 2x the CA average – yet also has the highest flower retail revenue.

We spoke with Sam Ghods, CEO of Connected to learn more about his transition from tech to cannabis, how Connected thinks about product and his vision for future growth. Sam joined Connected in 2018 after getting to know the founders. Prior to Connected, Sam was a co-founder at Box where he stayed on for 3 years after their successful IPO.

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

Sam Ghods: I originally came from the tech industry. I co-founded Box, a cloud sharing and storage company, in the mid 2000s with three other friends. We grew that from the four of us to eventually a multi-billion-dollar public offering in 2015. I stayed on a few more years after that until I took some time off trying to decide what I wanted to do next. I looked at a number of different industries and companies, but personally I always had a real passion for artisan and craft consumer goods. It’s a really big hobby of mine. Whether it’s going to Napa or learning about different kinds of premium consumer goods, I really had a deep love and never knew cannabis could be like that.

When I first met Caleb, the co-founder of Connected, he instantly got my attention by telling me that they had been selling out of their product in the volume of millions of dollars a year at more than two times what everybody else was selling for. That really piqued my interest because creating a product that has that level of consumer passion and demand is maybe the single hardest thing about building a consumer goods business. For them to have been so successful in what was a very difficult and gray market to operate in at the time – this was mid 2018 that I was speaking with him and he had been building this company since 2009 – is a really big challenge, and really impressive.

Sam Ghods, CEO of Connected

So, I started spending time with Caleb and the Connected team and learned a lot about the business. Everything I learned got me more interested and more excited. The way that they thought about the product, the way they treated it was with a reverence and level of sophistication I had no idea was possible.

I was so excited to just learn about the space. I mean, honestly, it feels like the internet in the 90’s- The sheer possibility and excitement. The only difference here is that the market already has existed for 100 years plus: the gray and underground markets for this product are actually phenomenally mature. And now we’re lifting up billions of dollars in commerce that’s already occurring and attempting to legalize all of it in one fell swoop, which creates such an interesting set of challenges.

I first got involved as an advisor on fundraising and strategy. And then a few months later, they were looking for a CEO and I joined full time as CEO in September 2018.

Aaron: What trends in the industry are you focused on?

Sam: It may seem basic, but I think product quality in the broader cannabis markets nationally and internationally is really underrated. Because of the extreme weight of the regulatory frameworks in so many different markets, it’s resulting in a lot of product being grown and sold just because it can be by the operators that are doing it. In many markets, they count the number of producers by the handful, instead of being measured in hundreds or thousands like in California or Oregon. And in that kind of environment, you’re not really having competition, and you’re not really able to see the quality that has existed in this category for years and years and years.

That’s one of the things that really sets us apart – the quality is first above all else, as well as the innovation and time that has gone into it, and not many existing brands in the legal market can say that. With some of the “premium” brands on the market, it would be comparable to just jumping into the wine industry one day and thinking that you can become a premium brand, without having any knowledge of the history of the product or the industry itself. At Connected, we have a team that’s been doing this for over a decade. We did a back of the envelope calculation: there’s over one thousand lifetime harvests between our team. We’ve also brought in specialists from Big Ag and other industries to complement that experience.

Cannabis is a very, very difficult plant to grow at a very high level. It’s much more like high-end wine or spirits than other fruit or produce. I think in the cannabis community, that’s extremely acknowledged, and appreciation for that is the reason we get by with the highest prices in the legal market. I think in the broader investor and financial community, this point hasn’t really hit home, because the limited license markets aren’t mature enough, and there isn’t enough competition in many of them.

Our focus is continuing to make the best product we can, which has fed and developed our brands [Connected and Alien Labs] into what they are today. That is our number one focus, and we think it’s pretty unique to the space of not just cultivating a great quality product, but also as far as breeding, pushing the bar higher and higher on what can be done with the genetics of the plant. 

Aaron: How do you think about choosing testing labs?

Sam: So, the number one criterion is responsibility and compliance. We must be completely confident that they’re testing accurately, safely and exactly to the specifications of the state. Then from there, it is really cultivating about a partnership. There’s a lot of nuance in the relationship with a testing lab. We note things like: Are they responsive? Are they sensitive to our needs in terms of either timelines or requirements we have? It does come down to timelines and costs to a certain extent, like who’s able to deliver the best service for the best cost, but it really is a partnership where you’re working together to deliver a great product. Reliability and consistency are big pieces as well.

Aaron: Industry estimates for illicit market activities are something like 60% of the California market. From your perspective, how do we fix that?

Sam: I think it probably comes down to funding for the efforts to discontinue those activities and opening up the barrier to entry, incentivizing “illegal” operators to make the investment in the cross-over. I think the most successful attempts to tamp it down was when there were initiatives that were well-orchestrated and well-funded, allowing for legacy growers to actually cross over to the “legal” industry. You can’t launch an industry with such an extreme amount of regulation, set a miles-high barrier to entry, and then penalize legacy growers for continuing their business as-is. If the illicit market continues to be fueled by rejection, you’re not going to achieve the tax revenue that you’re expecting to see, that we all want to see. There needs to be an attitude that every dollar put into transitioning illicit markets into regulated markets is returned many times over in tax revenue to the state’s citizens.

Aaron: So, I understand you sell wholesale. Do you sell direct to consumer?“Once they hit the shelves, we blow people away again, beyond their expectations of what they had before.”

Sam: We own and operate three retail stores, so we do sell direct to our consumers, but at this point the majority of our product is sold through third party dispensaries.

Aaron: Do you make fresh frozen?

Sam: We do. On the cultivation side we have indoor, mixed light and outdoor. We fresh freeze a portion of our outdoor harvest every year, and then we use that fresh frozen for our live resin products, for example, our recent live resin cartridge. It creates a vape experience really unlike any other because we are using our regular market-ready flower, but instead we’re taking that flower and actually extracting, not just using the distillate and mixing a batch of terpenes with it. We extract the entire plant’s content across the board, from cannabinoids to terpenoids and everything in between, and then you have our live resin cartridges.

Aaron: How do you think about brand identity and leveraging the brand to command higher prices?

Sam: The cycle we’ve effectively created is that every time we do a release of a new strain or a new batch or harvest, the quality is generally going up. That quality is released under our brands, and then the customer is able to associate that increase in quality and reputation with those brands. Then for our next launch, we have an even bigger platform to talk about the products and to ship and distribute and sell the products. Once they hit the shelves, we blow people away again, beyond their expectations of what they had before. That continuous cycle keeps fortifying the brand and fortifying the product. From our perspective the brand is built 100% on the quality of the product. The product will always be our highest priority and the brand will come downstream from that. 

Aaron: Tell me about Alien Labs.

Sam: Alien Labs was an acquisition. It was a company that had built their brand really successfully in the gray market through 2017 and Prop 215 in California and had an incredible level of quality, a really loyal and dedicated fan base, not to mention a tremendous Instagram presence and following, which is where 98% of cannabis marketing happens today. We really loved the spirit of what the founders were bringing to the table. In 2018, we decided basically to join forces with them and bring them on board, creating a partnership where they leverage our infrastructure and the systems and processes we’ve built, but still keep their way of cultivation and their product vision. To this day, Ted Lidie, one of the founders, continues as the lead brand director for Alien Labs.

Aaron: In what geographies do you currently operate?

Sam: Our primary offices and facilities are based out of Sacramento, California, but we have facilities throughout the state. Last year, for the first time we launched operations in a new state, Arizona. As you may know, you’re not allowed to take cannabis products across state lines at all, so if you want consistent product in multiple markets you really have no choice but to rebuild your entire infrastructure in each state you want to open up.

There are many brands that are expanding and launching in more markets more quickly, but they’re doing so by taking product that’s already existing and putting their brand name on it. That is something we’ve decided strategically that we will not do. We’ve spent years building a high level of trust with our customers, so we’re only going to put our brand name on products that are our genetics, our cultivation, our style, our quality of product. When we launched in Arizona, we did it with a facility that we leased and took over and now operate with our staff. We’re replicating the same exact product that you can get in California in Arizona, which is really exciting.

We launched just this past November, which has been incredibly successful. Our dispensary partner Harvest saw lines of dozens of people out the door.“We consider ourselves a flower company first and foremost, so for us, that was a very calculated strategic move.”

Aaron: Any new geographies on the horizon that you can talk about?

Sam: We’re constantly evaluating new opportunities. I don’t have anything particularly specific to announce right now, but I will say we look for states where we believe there’s a competitive environment where the product quality is going to really stand out and be appreciated.

Aaron: Do you notice any differences in consumer trends between California and Arizona that stand out?

Sam: Not too many yet. We don’t have a retail location in Arizona, so we don’t have as much direct contact. However, we have heard consistently that the Connected customer demographics – as you would imagine most interested in our product – are those looking for something special, unique, different and have a really superior quality to everything else out there. We ended up launching in Arizona with the highest price point for flower in the state, and we say that’s just the beginning. The market is still so young and immature, both nationally and internationally, that this category is going to develop into one that’s really taste-driven.

Aaron: What’s next in California?

Sam: Continued growth and product development. We want to keep blowing away our customers with more and more incredible products, different product types and categories. For example, the cartridges were a really big launch for us because we don’t really consider ourselves a vape company. We consider ourselves a flower company first and foremost, so for us, that was a very calculated strategic move. We were only going to launch the product if we could fully replicate what the consumer gets from the flower experience. We are very unlikely to ever release a distillate pen, for example.

Aaron: What are you personally interested in learning more about?

Sam: We, as a society, really don’t know very much about the cannabis plant. Pretty much all meaningful research around cannabis stopped in the early 1900’s with prohibition. In the meantime, we’ve performed millions of dollars of studies and research on almost every other plant that we grow commercially. We understand these plants extraordinarily well. Cannabis science is stuck back in agriculture of early 1900s. The most interesting conversations I have are around how the plant works, how it doesn’t work and the ways in which it is so different from all other plants with which we are familiar. Our head of cultivation comes from Driscolls, the largest berry company in the world, and even he is frequently surprised by the way the cannabis plant reacts to things that are commonly understood in other plants. So, the way the actual plant responds to different environments is truly fascinating and something I think we’ll be learning about for decades and decades to come.

Aaron: Okay, great. That concludes the interview. Thank you, Sam!

The (Arrested) Rise of Craft Cannabis in Canada

By Steven Burton
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It’s no secret that the rollout of cannabis legalization has underperformed in countries like Canada. Since legalization in October of 2018, industry experts have warned that the projections of the big cannabis firms and venture capitalists far exceeded the expected demand from the legal market.

Today, major production facilities are closing down, some before they even opened, dried flower inventory is sitting on shelves in shocking quantities (and degrading in quality), and an extremely robust illicit market accounts for an estimated 80% of the estimated $8 billion Canadian cannabis industry. None of those things sound like reasons for optimism, but while some models for cannabis business are withering away, others are beginning to put down stronger roots. Crucially, we are beginning to see new business models emerge that will be able to compete against the robust black market in Canada.

The Legal Cannabis Industry Can’t Compete

Legal rollout in Canada could easily be described as chaotic, privileging larger firms with access to capital who were able to fulfil the rigid – and expensive – regulatory requirements for operating legally. But bigger in this case certainly did not mean better. The product these larger firms offered immediately following legalization was of a lower qualityand higher price than consumers would tolerate. In Ontario, cannabis being shipped to legal distributors lacks expiration dates, leaving retailers with no indication of what to sell first, and consumers stuck with a dry, poor quality product.

The majority of existing cannabis consumers across the country prefer the fresher, higher quality and generally lower priced product they can easily find on the illicit market. That preference couldn’t be clearer when you look at the growth of inventory, which is far outpacing sales, in the graph below:

Source: Government of Canada

Which brings us to the crux of the matter: when it comes to building up the Canadian cannabis industry, what will succeed against the black market that has decades of expertise and inventiveness behind it?

Rising From the Ashes: Craft Growers and Other Small-Scale Producers

The massive facilities like Canopy’s may be shutting down, but our friends over at Althing Consulting tell us that those millions of square feet facilities are being replaced by smaller, more boutique-style cultivation facilities in the 20,000 ft tier, which are looking to be the future of the industry.

Consumers have consistently shown a strong preference for craft cultivators and other small-scale producers who produce higher quality, more varied products that are more responsive to consumer needs. It also hasn’t hurt that prices are also coming down: Pure Sun Farms in Delta, BC is consistently selling out of their $100/ounce special, which is highly competitive even with the illicit market.

This vision of the industry matches up better with the picture we’ve been getting from other legalization projects around the world. It also squares with other indicators of success. Despite the small market capture of the legal market, industry employment numbers are still relatively high, especially when compared with more established legal consumer products markets such as beer. In fact, craft cannabis growers now employ nearly as many people as the popular craft brewing sector here in British Columbia.

But in order to make the craft cannabis market actually competitive in both the regulated and unregulated spaces, the government will have to address four major challenges.

Challenge #1: License Distribution is Uneven and Chaotic

A December 2020 report by Ontario’s auditor general contains admissions by the Alcohol and Gaming Commission of Ontario (AGCO), Ontario’s cannabis industry regulator, that they lack the capacity and resources to manage the number of applications for private cannabis retailing. Problems relating to the issuing of licenses, including long delays and difficult requirements, are widespread across provinces. One way this becomes clear is by looking at the very uneven distribution of stores across the country in the graph below.

Source: MJBiz Daily

Challenge #2: Basic Regulatory Compliance is Complex and Time-Consuming

Smaller-scale micro cultivators, whose good quality craft product remains in high demand, still face prohibitive barriers to entry into the legal market. Licensing from Health Canada is one onerous challenge that everyone must tackle. Monthly reporting requirements have in excess of 477 compliance fields. Without additional support to navigate these requirements – including automation technology to ease the administrative burden – these smaller producers struggle to meet the minimum regulatory standards to compete in the legal market.

Challenge #3: A Long-Distance Road to Compliance and Safety Means Higher Costs

Even with all regulatory requirements satisfied, cannabis cultivators can’t sell their product from “farm to fork” (to borrow a phrase from the food industry). Many growers ship their product to be irradiated in order to ensure they are below the acceptable microbial threshold set by Health Canada. While irradiation positively impacts the safety of the product, new evidence shows that it may degrade quality by affecting the terpene profile of the plant. Furthermore, only a few facilities in Canada will irradiate cannabis products in the first place, meaning that companies have to ship the finished product sometimes thousands of kilometers to get their product to market.

Next year, Health Canada looks set to lower the limit on microbials, making it virtually impossible to avoid cannabis irradiation. If Health Canada follows through, the change will be a challenge for small-scale cultivators who strive to prioritize quality, cater to consumers who are increasingly becoming more educated about terpene profiles, and seek to minimize the environmental impact of production.

Challenge #4: It is Virtually Impossible to Market Improved Products

Finally, there is a marketing problem. Even though the regulated market has made dramatic improvements in terms of product quality from legalization two years ago, Health Canada’s stringent marketing restrictions means that cannabis producers are virtually unable to communicate these improvements to consumers. Cannabis producers have little to no opportunity to reach consumers directly, even at the point of sale – most legal sales are funneled through government-run physical and online stores.

What Can a Thriving, Legal Cannabis Market Look Like in Canada?

The good news is that change is being driven by cannabis growers. Groups like BC Craft Farmers Co-Op are pooling resources, helping each other navigate financial institutions still hostile to the cannabis trade, obtain licenses and organizing craft growers to advocate to the government for sensible regulatory changes. As a result of their advocacy, in October, the federal government initiated an accelerated review of the Cannabis Act’s restrictive regulations related to micro-class and nursery licenses.

Now, more co-op models are popping up. Businesses like BC Craft Supply are working to provide resources for licensing, quality assurance and distribution to craft growers as well. Indigenous growers are also showing us how cannabis regulation could work differently. Though Indigenous cultivators currently account for only 4% of Canadian federal cannabis licensees (19/459), that number looks to be growing, with 72 new site applications in process self-identified as Indigenous, including 27 micro cultivators. In September, Williams Lake First Nation entered into a government-to-government agreement with the province of British Columbia to grow and sell their own cannabis. The press release announcing the agreement includes the following statement:

“The agreement supports WLFN’s interests in operating retail cannabis stores that offer a diverse selection of cannabis products from licensed producers across Canada, as well as a cannabis production operation that offers farm-gate sales of its own craft cannabis products.”

More widespread adoption of the farm-gate model, which allows cultivators to sell their products at production sights like a winery or brewery, has a two-fold benefit: it better supports local, small-scale producers, and it offers opportunities in the canna-tourism sector. As the economy begins its recovery alongside vaccine rollouts and restrictions on travel ease, provincial governments will have the chance to leverage the reputation of unique regional cannabis offerings (i.e. BC bud) through these farm-gate operations.

While the cannabis legalization story in Canada has had its bumps, the clear path forward for greater legal market success lies in increased support for micro-cultivators. By increasing support for these small-scale producers to navigate regulatory requirements, more will be able to enter the legal market and actually compete against their illicit counterparts. The result will be higher quality and more diverse products for consumers across the country.

Q&A with Bruce Macdonald, Chairman of C21 Investments

By Aaron Green
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Multi-state operators (MSOs) are on the rise in the United States, navigating complex regulatory frameworks to drive profitability through economies of scale and scope. C21 Investments is a vertically integrated cannabis company with operations in Nevada and Oregon; traded on the Canadian Stock Exchange (CXXI) and on the OTCQX (CXXIF). The company recently secured a commitment from Wasatch Global Investors, JW Asset Management (Jason Wild/TerrAscend) and CB1 Capital Management (Todd Harrison) who, in addition to C21’s CEO, provided an equity commitment for repayment of all convertible debt.

We spoke with Bruce Macdonald, Chairman of C21 Investments. Bruce joined C21 in 2018 after reviewing the company as a personal investment and getting to know the senior management team. Prior to C21, Bruce had a long and successful career in finance and capital markets at one of Canada’s largest banks.

Aaron Green: Can you give a brief overview of C21?

Bruce MacDonald: C21 is a cannabis company that has operations in both Nevada, and in Oregon. Oregon is fundamentally a wholesale business, and we recently announced a divestment of some non-core assets in the state. Our cash cow and where we currently see our best opportunity for future growth is our Nevada operations. We run a seed-to-sale business in the state with two dispensaries doing about $35M a year in revenue, with a 40% EBITDA Margin, and servicing 600,000 customers.

Aaron: Can you tell me about a little bit about your background and how you got involved in a cannabis company?

Bruce: I spent 37 years working for RBC in the capital markets business. I started as a floor trader, back when there was such a thing as a floor, and over the years held a number of positions, ultimately working my way up to Chief Operating Officer of the bank’s global capital markets division. Throughout my time, I built a lot of businesses, which was why C21 and this opportunity was so interesting to me.

My involvement in the cannabis sector was a bit of an accident, but it’s turned into a passion. It actually found me. I was an investor in the C21 IPO. I sat down with management to understand the investment and given my experience, they asked if I would consider becoming a member the Board. Since joining the Board, my involvement has been primarily focused on strategy and the financing side of the business. While I certainly didn’t anticipate it, it’s turned into a 24/7 gig and a challenge I am thoroughly enjoying.

Bruce Macdonald, Chairman of C21 Investments

Aaron: Can you tell me about the history of C21 becoming a MSO? Did you start in one state?

Bruce: While this history predates my time at the company, my understanding is that as a Canadian company, we had first mover advantage to be able to access public funding and get established in the US cannabis space. As part of that, the team at that time reviewed approximately 100 different properties. Because we were based out of Vancouver, the focus was primarily the Western states like Washington, Oregon, Nevada and California. Arizona wasn’t in the game yet. The first transaction C21 did was in Oregon, with a company called Eco Firma. In all, there were four acquisitions in Oregon, and one in Nevada. In fact, it was the investment in Silver State (Nevada) that was by far the most meaningful. As far as our Oregon assets are concerned, we have worked hard to integrate and streamline them into an efficient operation.

So, when I joined the Board, we were just completing the paperwork on the acquisitions, and finalizing our strategy and business plan to go forward.

Aaron: Today there are a number of MSOs. How does this more crowded market impact your value proposition; how do you think about gaining and maintaining strategic advantage?

Bruce: It’s important first to start with strategy. From a strategic perspective, we had the advantage of being the first operator in Nevada with Silver State. Sonny Newman, our CEO, started the business back in 2013. We run a seed-to-sale business so we have a deep knowledge of all aspects of the operation and really know the Nevada market. In fact, 70% on a dollar volume basis of the 700 SKUs that we sell are products that we manufacture. It’s a critical piece of our strategic advantage.  

What I would say is our most important strategic advantage is the fact that C21 is a stable, self-sustaining operator. What I mean by that is we’re one of the few businesses that actually makes money. This is what really allows us to be strategic and disciplined in our approach to growth. For example, it’s been more than 18 months since we did our last capital raise and that’s by choice. Every decision we make is through the shareholder lens and focusing on delivering value to customers and shareholders.

Looking at our value proposition, simply put, it comes down to four things – the right products, at the right price, in the right location, with the right environment. Some people might call this motherhood, but there’s a lot of work that goes behind each of them. 

Great quality products, that’s table stakes. You have to be a top-notch grower and generate quality products that people demand if you want to build a loyal customer base. Right price – to some it sounds like just putting the right sticker on the package – it’s not. It’s all about making sure you are efficient in your operations because to be profitable, you have to be a low-cost producer to deliver on a lower price promise. Tons of work has gone into our operation around being a “right price” business. 

Right location is another important element of our value proposition. We wanted to build a loyal customer base which for us meant focusing more on locals than on tourists. This is why Sonny positioned the dispensaries on commuter paths.

The last key factor is having the right environment to sell our products. In Nevada, the company ended up building fit-for-purpose dispensaries rather than fitting ourselves in a strip mall. We cater to over 600,000 clients a year. Now we’re doing 10,000 curbside pickups a month. With that type of volume, logistically speaking you need ample parking, a well-lit exterior so people feel safe, and of course, great curb appeal. These factors are essential in maintaining a loyal customer base.

Aaron: Tell me more about Silver State Relief and why it has been so successful?

Bruce: I think what you’re really asking for is: what is Sonny’s secret sauce? There are a few ingredients that go into it. As I highlighted, it was a purposeful decision to build a business with a loyal customer base focused primarily on locals. That needs product, price, and convenience. Sonny lives in the Reno area, which is one of the main reasons Silver State is located up North.  

Critical to success has been the culture of the organization. Let’s start with the company being nimble and I’ll give you an example. The early days of the pandemic included the complete shutdown of dispensaries. We went from serving over 1500 customers a day in our stores to the next day being told that we could offer delivery only. Within a week, we were able to pivot and had lockboxes, regulatory approvals and a delivery capability. When you look at our Nevada operation, we ended up with just a 10% dip in our revenues for the quarter, even though we had to live through six weeks of delivery-only and then a phase of curbside-only.

Another key element of the culture is our laser focus on cost management. We’ve talked a little about cost management, but it’s absolutely critical, especially in the context of the high cost of capital that we see in this sector. Add to that the punitive tax impact of 280e where federal tax is applied to gross margins which means SG&A and interest are non-deductible expenses for tax purposes. So, to enhance our profitability, we are intent on having the lowest SG&A of the public cannabis companies. We’re also among the lowest in interest expense. That whole drive for efficiency has given us a formula and a mantra that has allowed us to have a stable business with significant cash flow. We get to make strategic decisions — not hasty or desperate ones — and focus on what’s good for the shareholder.

Aaron: How was C21 capitalized?

Bruce: We did a $33M raise on the RTO of a listed shell company. That was how C21 was established, and then signed contracts with the Oregon and Nevada properties.

Aaron: I recently saw a press release about expanding the Nevada cultivation. Can you give me some more details? 

Bruce: We announced that we are tripling our capacity within our existing 100,000 square foot warehouse facilities. We’re going to build out another 40,000 square feet, and we currently use 20,000. That’s the tripling. Expanding our cultivation was clearly the next logical step in our growth story. This should yield us an additional 7,500 pounds of high-quality flower. We can do this very cost effectively with about $6M in capex, and we anticipate funding the project internally. We will still leave another 40,000 square feet of expansion capacity as market needs justify.

This announcement was significant, but I don’t think it was fully understood by the market. Just to play with some numbers, 7,500 pounds of flower has a wholesale market value today of about $17M. It will cost us approximately $2M in incremental operating expense to add these additional grow rooms. We already pay the rent, so we just need to pay for the people, power, fertilizer and product testing. When you do the simple math, we see this as a big win for shareholders and extremely accretive on an after-tax basis. 

Historically, we always used to grow more than we needed, but with the increase in demand that’s going on in the market, we now run at a flower deficit. In the near term, this build-out will allow is to meet our current retail needs, with the balance that we will sell on the wholesale market. Ultimately, this positions us well on a seed-to-sale basis to support our plans to extend our retail footprint in Nevada. 

Aaron: It sounds like the decision was made based on both revenue growth and supply chain consolidation?

Bruce: Yes, and just the pure profitability of it! You can’t get a bigger, better bang for your buck from spending $6M to generate $17M with ongoing operating costs of $2M.

Aaron: The next question here is about the recent note restructuring and, and how the debentures was restructured. How’d that come about and what is the advantage now of having gone through that process? 

Bruce: This all fits into our medium-term growth strategy. For C21, the first thing we focused on was getting our house in order to ensure that we were efficient and profitable. We knew we needed to have a scalable machine to grow. The second step, which the debt restructuring relates to, was around fortifying our balance sheet. To support our growth plans, we needed to have a solid foundation.

Our balance sheet had two things that needed fixing. One was that we had an $18M obligation coming due to our CEO. The effect of the restructuring extended this obligation over the next 30 months at favorable terms. Additionally, $6.5M of convertible debentures were reaching maturity in January of 2021. And while the debentures were in the money and theoretically would convert to shares, we didn’t want to take the risk that our stock price could drift a bit and all of a sudden there could be significant cash required for redemptions. We’ve seen a lot of companies suffer significant unwanted dilution when their debentures get out of control. So, we approached Wasatch, Jason Wild’s JWAM and CB1 Capital, three seasoned investors, who provided a backstop whereby they would purchase any shares not taken up by people though the conversion of their debentures, so that we would be able to pay any debenture holders back cash with the money we would receive as the investors took shares. In exchange for providing this backstop, C21 gave them an upside participation in the form of warrants. I think it was absolutely critical to get this in place. And it’s phenomenal to have these three names in our corner. We couldn’t imagine better partners.

Aaron: So, what’s next for C21? 

Bruce: I hope you are getting the feeling that here at C21 our objective is to play the long game. That means we make measured decisions with the interest of shareholders top of mind. We’ve worked hard in 2020 to get our house in order, fortify our balance sheet, and generate significant cash flow. I think we’re clocking in at around $12M in trailing annual cash flow, which interestingly, is about the same number that Planet 13 is doing. That’s obviously a fantastic result for a company with $150M of market cap.

“We are working with urgency to break the back of these sector economics.”When we think about our medium-term growth strategy, we will continue to make our decisions through a cash flow and earnings lens rather than hype and flash. While we will remain opportunistic with respect to strategic alternatives, the core of our expansion is going to focus on where we already have a proven track record: Nevada. We’re big believers that to achieve long term success, you have to own your home market. And what I mean by that is today we’re about 5% of the Nevada market. Owning your home market looks more like a 15% share. That is our focus. I think we’ve shown that our disciplined approach delivers results – results such as having top five metrics in Net Income, Cash Flow and EBITDA Margin, across the range of public companies that we can see.

I think it’s key we’re getting noticed. We talked about the strategic investors, but we’re also one of the 17 plant-touching companies that’s in the MSOS ETF. So, we’re going to follow our clear growth trajectory, focused on the bottom line and delivering for shareholders. If you look under the hood right now, you see a 10% cash flowing company, which is a pretty rare bird in our industry. We’re excited about where we are.

One thing I haven’t touched on in great detail is our plans for expanding our retail footprint. How do you grow in the dispensary space? Aaron, I think what’s key here is looking at the expected return relative to the cost of capital. For example, if you targeted buying a dispensary with $20M in revenues, and are able as we are, to generate 25% in after-tax cash based on those revenues, then once optimized, it would generate $5M in earnings. An asset like this is going to trade at roughly one and a half times revenues. So, you’re going to have to pay $30M. For the people that have been going out and borrowing money at 15%, their annual cost would be $4.5M. We’re not going to give four and a half to the moneylenders, it just doesn’t make sense for shareholders. We are working with urgency to break the back of these sector economics. It is something we believe will be afforded to companies with stable earnings and profitability such as ours. Of course, no deal’s a deal until it’s on the tape, but we are very hopeful that we have cracked the code ahead of SAFE Banking to get capital costs down. This is just a little bit of an inside look into our thought processes.   

Aaron: Okay, awesome. All right. That concludes the interview.

What Cannabis Businesses Need to Do to Adapt to COVID-19

By Arthur Gulumian
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How COVID-19 Impacted Cannabis Businesses

Before jumping into what cannabis businesses can do amid this pandemic, it is crucial to explore the specifics behind how the virus impacted the industry as a whole. From a surface level, it seems obvious what happened: dispensaries had to implement social distancing protocols, require both customers and employees to wear masks and limited the number of customers that can be present on the point-of-sale floor room. But COVID-19 did not merely make shopping experiences a tab bit inconvenient.

Cannabis producers, and especially those involved in manufacturing cannabis goods, experienced an apparent disruption in their production schedules. If the metals and plastics were sourced from Wuhan, Shenzhen or any other dense industrial area in China, supplies suddenly stopped coming, and producers were left with limited production options. Businesses did not consider the value of having various vendors and instead put all their stock in one source. A disruption in production inherently impacts dispensaries.

COVID-19 impacted more than just supply chains, however. For instance, investors are now less likely than before the pandemic to invest in early-stage cannabis companies. Competition for capital now far outweighs the supply for cannabis companies, and we have seen (and will continue to see) a drop in company valuations. Indeed, COVID-19 is affecting more than just currently existing operators but those yet struggling to create cannabis businesses of their own.

Vendors & Supplies

A broad survey conducted by the Institute for Supply Management (ISM) between February 22, 2020 and March 5, 2020 found that 75% of U.S. companies had experienced supply chain disruption as a result of the COVID-19 outbreak. An estimated 90-95% of all components utilized in cannabis vaporizer pens were sourced from manufacturers in Shenzhen, China. In contrast, very few companies used domestic manufacturers. While this is just one example, it is equally important to note that cannabis-specific equipment and supply shortages were not the only factors that disrupted cannabis businesses. Shortages of personal protective equipment (PPE) presented challenges for cannabis dispensaries, producers and manufacturers that continued to operate during the “shelter in place” orders.

Operators must establish a resilient supply chain. Do not simply limit your options to one specific region, as this can be a costly mistake. Operators must cultivate an in-depth understanding of their supply chain beyond critical suppliers and their stress points; they need to develop and follow a systematic supply process that takes potential disruptions and stress points into account. When vetting potential vendors, always ask detailed questions that elicit evidence-backed responses. Ask vendors where they source their materials from, whether they have any history of experiencing disruptions in their supply chain and what kind of setbacks they have suffered as a result of COVID-19.

Investing in Your Core Business

In light of COVID-19, operators must invest in solutions that increase efficiency and improve the customer’s experience. This entails ensuring your customer safely enters and leaves your dispensary with a product they are satisfied with—the essence of any retail operation. Your operation should focus on enhancing customer flow as opposed to encouraging aimless roaming. Having an open-space, Apple store style dispensaries might have been a popular option before, but times have changed, and dispensaries must adapt.

Guided purchases offer not just more efficient transactions, but also serve to ensure that your waiting room isn’t backed up with an endless stream of unmanageable customers. Depending on your locally-mandated COVID-19 protocols, your dispensary will likely not be permitted to hold a high number of customers in the store, nor should it during this pandemic. Each customer service representative must be active as opposed to passive, directly asking customers what they are interested in, offering product or strain choices when customers seem unsure and answering questions as thoroughly as possible to avoid confusion and inherently delays. Be sure to emphasize the value of guided purchases to your employees and how they can promote the safety of both themselves and their customers.

Maintaining Urgency

The uncertainty of COVID-19 and its impact on the general economy has left many individuals “clocked out.” Simply put, many people feel that they should wait until things go back to normal before making any critical decisions. As essential businesses, cannabis operators cannot afford to make this same mistake. Now is not the time to sit back, reflect and wait for the vaccine. Instead, operators must work to precisely assess how COVID-19 impacted their business and execute a clear plan of action to address foreseeable problems.

Execution is far more important than perfection; you’ll need to make changes on a dime and avoid spending excessive hours obsessing over debating specific actions rather than taking them. It is far more essential to get tasks done versus ensuring they are perfect. If something is not working in your business, it must be readdressed or removed entirely from the protocol. It is far better to make necessary changes now amid the pandemic as opposed to reactively waiting and seeing what may come next following it.

Stay nimble by cutting out any factors that may be slowing down your company’s efficiency. Is your point-of-sale system causing issues? Can you use a better payment processing tool? Are any employees underperforming? Are there any internal policies that may be hindering your employees’ ability to work as optimally as possible? These are some of the many factors that must be considered to ensure your business stays agile and adaptable. Determine what is working against you and execute a plan of action to address. Do not wait and do not take shortcuts around regulations.

Understanding the Shift in Purchasing Behavior

Regardless of whether or not a vaccine for COVID-19 is completed anytime soon, operators must know that there is no “returning to normal.” People’s habits and behaviors have changed due to this virus, whereas slow browsing of items might have been preferable for some individuals before COVID-19; this is likely not the case today. Furthermore, research groups like Accenture have found that most customers expect their shopping habits to change permanently.

Source: Accenture COVID-19 Consumer Research, conducted April 2–6. Proportion of consumers that agree or significantly agree.

In the study mentioned above, shopping more consciously is one of the two top priorities for customers during this pandemic. According to Accenture, “[c]onsumers are more mindful of what they’re buying. They are striving to limit food waste, shop more cost consciously and buy more sustainable options. Brands will need to make this a key part of their offer (e.g., by exploring new business models).” Furthermore, customers are now more likely to shop locally; this is why community engagement would be especially important to ensure you develop transparency and trust between your brand and your customers. Understanding this shift in purchasing behavior will remain one of the more crucial tasks of any cannabis operator.

Expanding Sales Avenues

More and more customers are now relying on online and curbside purchases than ever before. Dispensaries must look to their current sales avenues and determine where key focuses should be made. Use your sales data to determine where customers are making their purchases the most, be it through third-party delivery services such as Eaze, standard home delivery, online ordering or curbside pickup. Focus on identifying friction and streamlining the user experience on all customer-facing platforms and services. Equally, consider which platform your customers are using the most to make purchases; are they making more online purchases, or do most still prefer direct shopping at the store? Remember that having more products doesn’t necessarily mean more revenue. You must also identify which products are performing well and which have low margins.

These considerations can help strengthen your highest performing platform while working to fix any more inferior performing platforms. As stated before, stay nimble; if something is not working out, cut it out from your business model, and move forward. Do not be afraid to cut poor-performing platforms to hone your focus on the successful ones. Since post-COVID-19 shopping behavior is likely to stay permanent, these changes may still be applicable following a slowdown or cessation of the virus.

Delighting Your Customers

Virus or not, customer satisfaction remains one of the most crucially defining points for the future of your business. Your customers must be safe and must be happy with their purchase. To ensure this outcome, you need to maintain adequate safety policies while equally promoting streamlined purchases. Although a limited number of individuals may be annoyed with over-the-top safety precautions, most customers will enjoy the heightened security that comes alongside these types of measures.

Contactless service, such as having customers scan their identification upon entry or encouraging more credit card versus cash transactions, can increase customer satisfaction, as they will feel a stronger sense of security when shopping at your dispensary. Focus on streamlining curbside pickup. Things such as requiring vehicle descriptions (e.g., license plate numbers, color, make) for curbside pickup purchases can go a long way in helping employees quickly identify customers.

Equally, be sure there is hand sanitizer available near the entrance of your dispensary. This adds a further sense of security for your shoppers. Delivery should be consistent; delays and setbacks must be minimal to win the confidence of your customers. Take the extra steps to ensure your dispensary is clean and products hygienic. All these factors work to increase customer satisfaction while maintaining their safety, and more importantly, impact the level of trust your customers have in association with your brand.

Scaling Operations Taking Advantage of Limited Competition in Emerging Markets

As stated before, several individuals—including existing and emerging cannabis businesses—are clocked out following COVID-19. This mindset is not only detrimental for operations but can also impact how you scale your business. New markets are coming online and will continue to do so as regulators are increasingly incentivized to replenish government coffers. Riverside County in California, for instance, is now allowing for capless licenses for all cannabis business types. However, what remains the key focus for regulators is expanding the number of delivery and distribution operators. In Massachusetts, delivery endorsements for dispensaries are available without a set deadline to social equity applicants and do not have a defined cap. In Illinois, the cap for transporters was equally removed, and each applicant who scores above 75% will receive a license.

These types of licenses are now more valuable than ever before for two reasons. The first reason is that regulators are keener to award delivery and transporter licenses than other types. Secondly, customers now prefer home delivery over shopping in stores due to COVID-19. With more people clocked out during these times, you have far more opportunities and far fewer competitors during application processes. Use this time to truly develop a strategy for expansion, as the chance might not come so quickly again.

Conclusion

As a final point, be sure to expand your online presence during this time. Although you may not have the capacity to reflect your company’s personality and value through quick in-store transactions, you can use social media to encourage product reviews, social interactions, and recommendations. Invest in marketing through social media platforms. Platforms such as TikTok have helped form communities of like-minded individuals. Use platforms such as that to highlight your company’s personality and values, avoid being “salesy” and focus more on being funny, entertaining and just alive. Character adds value to your business.

People want to laugh, to feel safe and they want to live. Create social interactions and immersion and always prioritize being honest and transparent with your customers. This final point stands as equally as important as the rest of the considerations highlighted throughout this article. Stay nimble, stay active and stay alert! Do not view the chaos behind this pandemic as a pit, and instead see it as a ladder. Track down opportunities, do not be afraid of change, and, more importantly, do not wait for an answer to COVID-19, be the answer.

Thinking of Hiring a Cultivation Consultant? Here’s What You Can Expect

By David Perkins
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Hiring an experienced cultivation consultant is yet another cost, amongst the laundry list of never-ending expenses in the setup of a regulated, recreational grow. However, in the big picture it can actually save you a significant amount of time and money by providing you with the information you need to formulate a realistic budget, profitable cultivation site and a well-trained workforce. This article will explore just some of the many benefits a cultivation consultant can provide to your company.

An experienced consultant will have a vast array of knowledge to ensure the success of your company. One important area they can advise you on is budgeting. With years of experience cultivating, in both medical and recreational markets, an experienced consultant will have knowledge of not only start-up costs, but also hidden costs you must prepare for in advance. They will also be able to advise you on strategies to avoid future costs and problems. There may also be expenses in the build-out of your cultivation site you have not considered. For example, you may need a waste water treatment plan if you have any fertilizer run off that will flow to a sewage drain. It is important to know all possible costs when securing your investment or planning out your budget for the year.

Setting up a large-scale cultivation site in a regulated market can be extremely costly. Gone are the days of putting up a few lights in a closet; growing in a regulated market requires a larger scale, and therefore, larger costs and more complications. A consultant experienced in design and implementation of such large-scale, intricate cultivation plans will provide you with the knowledge you need to properly set-up and maintain your facility in order to ensure your company’s success. They will also know the tips and tricks to save you money along the way.

Something as simple as a centralized irrigation distribution zone can save you a lot of time and money.

A good consultant will be able to advise you on the design of your facility to ensure that the layout supports productivity, and that there is a proper workflow. It is important to hire a consultant before you get started with the build out of your facility, as it will be much more costly to have to correct mistakes in your design later on down the road. An experienced consultant will implement superior facilities layout and design to avoid future problems at the outset. Something as simple as a centralized irrigation distribution zone can save you a lot of time and money.

Once you have created the proper space, cultivation planning is important to avoid unnecessary problems from arising, which will ultimately delay profit. A well thought out cultivation plan will help you plan for success. A consultant will know what does and doesn’t work. For example, some equipment will run off an app on your phone; while convenient, there are some that don’t perform well which could end up costing the entire crop. These are things you want to know and work around, before you spend money unnecessarily.

An experienced consultant will have previously worked in various types and scales of cultivation sites, and from that experience will be able to teach you which processes and techniques work, and which ones don’t. Someone with less experience may believe that watering plants by hand would be an easy method to keep your garden irrigated, but it is actually the most time-consuming labor task (and therefore extremely costly), while an automated watering system can be very simple and cost-effective to install.

Some equipment will run off an app on your phone; while convenient, there are some that don’t perform well which could end up costing the entire crop

A skilled consultant can provide necessary training for your employees. Let’s face it, this is an entirely new industry, and therefore, most people applying for entry-level jobs at a cultivation site are unskilled. However, the best path to success when dealing with large-scale cannabis cultivation is to have skilled, happy employees. Educating and properly training your employees is essential. It helps to teach employees not only how to complete a task, but to help them understand why they are doing a given task. This will give your staff the skills and confidence they need to complete the task properly. Unskilled hands in your garden can jeopardize the success of your cultivation.

Don’t make the same mistakes others have made. Hiring a cultivation consultant can help you to avoiding problems before they occur. A professional consultant has the knowledge required to predict issues and problems before they occur, or implement a solution when corrective measures are necessary. Oftentimes issues can be avoided just by knowing the cause and effect of decisions and the potential outcomes they will have.

A cultivation consultant should also have a wide network of professional contacts to help you address any issues or problems that arise. Having a network of professionals to employ when necessary is critical for ensuring the success of every project. For example, wholesale contacts for cultivation equipment can help you not only to get the best price, but also ensure you are using the best equipment possible for your situation.

If you are still unsure about whether or not you need a cultivation consultant to help plan out your grow, or fix your grow if you’ve encountered problems, feel free to contact me to discuss your needs. I assure you there are ways I can save you money, improve your yields, and help your company be more successful in this ever-changing market.

Large Scale Cultivation Planning: 4 Important Factors to Consider

By David Perkins
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Before you begin any large-scale cultivation project, you must necessarily consider the four factors highlighted below, among many others, to ensure your cultivation is successful. Failure to do so will cost you greatly in both time and money, and ultimately could lead to failure. While the four areas highlighted below may be the most important considerations to address, you should hire a cultivation advisor to determine the numerous other considerations you must deal with before you begin.

1. Genetics

Genetics will play a huge role in your cultivation plan, as they can ultimately make or break the success of your business. Access to quality, verified genetics will greatly affect your profits. All cannabis genetics grow differently and may require different conditions and nutrients. Further, consumers in today’s regulated market have greater awareness; they are much more knowledgeable about genetics and able to discern between quality cannabis versus commercially produced cannabis.

Market trends will dictate whether or not you’ll ultimately be able to sell your harvest at market rate. You need to project out at least one year in advance the genetics you will be growing. But often it is impossible to predict what consumers will be purchasing a year in advance so this part of your cultivation plan should be well thought out. Further compounding this difficulty is the fact that it may take six months to ramp up production of any given variety.

Genetics that are popular now may still be popular next year, but that also means there will be more competition for shelf space, as more competitors will also likely be growing these same genetics. Therefore, don’t rely on only one trendy variety as the bulk of your selection for the year, no matter how popular it is at the moment. Producing a single variety as the bulk of your crop is always risky, unless you have a contract with a sales outlet, in advance, for a set quantity of that one particular variety. Diversity in your genetics is beneficial, when chosen correctly.

Making proprietary genetics from your own seed collection can give you a big advantage in today’s competitive market. Having a variety with a distinct, unique and desirable smell, taste, effect or cannabinoid profile will allow you to distinguish your brand amongst others. Entire brands have been built off of a single variety: Cookies and Lemontree are two examples of companies that have done this. All it takes is one really good variety to attract a lot of attention to your brand. Having your own breeding project on site will allow you to look for and identify varieties that work for you and your business model, and ultimately will help to distinguish your brand apart from others.

Only buy seeds from reputable breeders! Any new varieties that you are going to be cultivating should be tested out at least three times, on a small scale, before being moved into a full production model. If you are growing from seed there is always the potential for your crop to get pollinated by male plants or hermaphrodites that went unnoticed, and therefore, they could be a potential risk to your entire harvest. Treat them accordingly, i.e. by cultivating them on a small scale in a separate, enclosed area.

Buying clones from a commercial nursery can be risky. Genetics are passed from one grower to another haphazardly, and names are changed far too easily. This can create a lot of confusion as to what variety you are actually purchasing and whether you are getting the best version of the genetics. Just because a clone is called “sour diesel” doesn’t mean you’re actually getting the real, authentic sour diesel. And to further complicate things, the same clone grown in different environments can produce a noticeable difference in flavor, smell and effect depending on your cultivation method. Always try your best to verify the authenticity of the genetics you purchase. Ask about the history and origin of the particular genetics you are purchasing. Better yet, ask for pictures, physical samples, and most importantly, certificates of analysis from a laboratory, indicating the potency. In many states anything under 20% THC is going to be hard to sell, while anything over 30% will easily sell and command the highest price. It’s a good idea to have a laboratory test the terpene profile in order to verify a variety is actually what the seller purports it to be.

Knowing the source of your genetics is imperative. It will help ensure that you actually have the variety that you were intending to grow, and therefore, allow you to achieve your intended results. Knowing what varieties you are going to cultivate, before you grow them, will also give you a better idea of the ideal growing conditions for that specific variety, as well as what nutrients will be required to achieve optimum output.

2. Automated Watering Systems

Installing an automated watering system, during build out, will by far be the most cost-effective use of your money, and will save you the most amount of time in labor. An automated watering system, commonly referred to as a “drip system” or “drip irrigation,” is necessary regardless of whether you are cultivating indoors or outdoors; it will allow you to water multiple different areas at once, or only water a few specific areas of the garden at one time. Hand watering a 22,000 square-foot cultivation site will take one person eight hours every single day, on average, to maintain. However, a properly designed drip system can water an entire large-scale garden in a couple of hours, without any employees, record all the relevant data and notify you if there is a problem. This enables you more time to spend closely inspecting the plants to ensure there are no bugs or other problems present, and that your plants are healthy and thriving. This attention to detail is necessary if you want to have consistent success.

Larger scale cultivation requires bigger and more expensive equipment.

Automated watering systems not only save a great deal of time but also eliminate the possibility of human error, like over watering, which can kill an entire crop quickly. There aresoil moisture sensors  that can be placed in the soil to regulate the supply of water to the plants in a precise manner. Without an extremely skilled, experienced work force, damage to plants due to over watering is very common. A drip system will reduce the threat of human error by ensuring delivery of precisely the correct amount of water and nutrients to each plant every single time they are watered.

Not all drip systems are created equally. There are different types of automated watering systems. Designing the right drip system for your cultivation site(s) can be complicated. Make sure you do your research, or better yet, work with a cultivation advisor who has experience with automated irrigation systems in conjunction with a licensed plumber, to ensure you are installing the best system for your particular set up.

Adding a fertilizer injector to your drip system can further increase the efficiency of your operation and save you money on nutrients by using only what you need and ensuring correct application. Again, automating this process will save you time and money, and reduce the threat of human error.

3. Nutrients

The types of nutrients you use and the amount of nutrients you use, are going to directly affect the quality of your cannabis flower. Conventional agriculture and Dutch hydroponic cannabis cultivation have always used salt-based fertilizers. However, they can be toxic for the plant in high amounts. While cheap and easy to use, salt- based nutrients are made in big factories using chemical processes to manufacture. They are not good for the environment, and overall, they produce an inferior product. The highest quality cannabis, is grown with organic living soil. Although seemingly contrary to popular knowledge, when done properly, cultivating in organic living soil is more cost effective than using powdered or liquid salt-based fertilizers.

Yield and quality depend on the skills of the cultivator, more than the method they are using. Having healthy plants from the start, will always yield better results, no matter what way they were grown. In my 20 years of experience I have seen plants grown in balanced living soil yield just as much as plants grown with synthetic nutrients. Further, the quality is not comparable.

Controlling your clone supply can ensure they are healthy

Always remember, it is the quality of your flower that will determine the price it is sold for, not the yield. Even if you produce more overall weight of chemically grown cannabis, if nobody wants to purchase that product, then you are going to yield far less profit than another company growing in the same amount of space using organic practices that yield a higher quality product.

The difference in quality between plants grown in balanced living soil versus any other method of cultivation is undeniable. It is really easy to post a pretty picture of a flower on Instagram but that picture doesn’t tell you anything about what went into producing it. When flower is produced using chemical nutrients, it is likely going to be harsh and not enjoyable to smoke. Lesson learned: don’t judge a bud by an Instagram photo! There is a stark difference between cannabis grown using synthetic nutrients versus cannabis grown in living soil. Once you’ve experienced the difference you will never want to consume cannabis that is grown any other way.

4. Plant Propagation

Having the ability to propagate your own clones, from mother plants that you have cultivated, can save you a staggering amount of money. In some states, having a cultivation license allows you to produce your own clones for your cultivation, while having a nursery permit will allow you to sell clones for commercial sales to other companies. The average price of a wholesale clone is around eight dollars. If you require 5000 plants for every harvest, that’s a $40,000 expense you must bear, every grow cycle. This can obviously add up quickly. And as previously mentioned there’s the risk of purchasing inferior genetics or unhealthy plants, both of which greatly affect your profit margins.

On the other hand, the cost of materials and labor to produce a healthy clone can be as low as one dollar when using advanced cloning techniques. Controlling your clone supply can ensure they are healthy and allow you to know exactly what you are growing each time. Further, it doesn’t take a lot of space to propagate your own cuttings. In a 400 square-foot space one could produce between 5,000 to 10,000 clones per month, all of which could be maintained by one person depending on your situation.

And last but definitely not least, the most important thing you can do to ensure the success of your cultivation, is hire an experienced knowledgeable grower who is passionate about cannabis. The success of your company depends on it. You need someone with the knowledge, experience, and skills to make your cultivation dreams a reality. You need someone who can plan your build-out and cultivation to ensure success from the start. And you need someone with the skills to handle the multitude of inevitable problems that will arise in a cost effective and efficient way.

These are just some of the many considerations you must account for when planning a large scale grow in the regulated market. An experienced cultivation advisor can help you with these, and many other considerations you will need to contend with before you begin your grow. Creating a well thought out plan at the outset can end up saving you thousands, if not hundreds of thousands of dollars down the road.

Soleil control panel

IoT & Environmental Controls: urban-gro Launches Soleil Technologies Portfolio

By Aaron G. Biros
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Soleil control panel

Back in November of 2017, urban-gro announced the development of their Soleil Technologies platform, the first technology line for cannabis growers utilizing Internet-of-Things (IoT). Today, urban-gro is announcing that line is now officially available.

Soleil control panel
Screenshot of the data you’d see on the Soleil control panel

The technology portfolio, aimed at larger, commercial-scale growers, is essentially a network of monitors, sensors and controls that give cultivators real-time data on things like temperature, humidity, light, barometric pressure and other key factors. The idea of using IoT and hypersensitive monitoring is not new to horticulture, food or agriculture, but this is certainly a very new development for the cannabis growing space.

sensor
Substrate sensors, used for monitoring Ph, soil moisture & electrical conductivity.

According to Brad Nattrass, chief executive officer and co-founder of urban-gro, it’s technology like this that’ll help growers control microclimates, helping them make the minor adjustments needed to ultimately improve yield and quality. “As ROI and optimized yields become increasingly important for commercial cultivators, the need for technologies that deliver rich granular data and real-time insights becomes critical,” says Nattrass. “With the ability to comprehensively sense, monitor, and control the microclimates throughout your facility in real-time, cultivators will be able to make proactive decisions to maximize yields.”

heat map
The heat map allows you to find problem microclimates throughout the grow space.

One of the more exciting aspects of this platform is the integration of sensors, and controls with automation. With the system monitoring and controlling fertigation, lighting and climate, it can detect when conditions are not ideal, which gives a cultivator valuable insights for directing pest management or HVAC decisions, according to Dan Droller, vice president of corporate development with urban-gro. “As we add more data, for example, adding alerts for when temperatures falls or humidity spikes can tell a grower to be on the lookout for powdery mildew,” says Droller. “We saw a corner of a bench get hot in the system’s monitoring, based on predefined alerts, which told us a bench fan was broken.” Hooking up a lot of these nodes and sensors with IoT and their platform allows the grower to get real-time monitoring on the entire operation, from anywhere with an Internet connection.

soleil visuals
Figures in the system, showing temperature/time, humidity/time and light voltage

Droller says using more and more sensors creates super high-density data, which translates to being able to see a problem quickly and regroup on the fly. “Cannabis growers need to maintain ideal conditions, usually they do that with a handful of sensors right now,” says Droller. “They get peace of mind based on two or three sensors sending data points back. Our technology scales to the plant and bench level, connecting all of the aggregate data in one automated system.”

In the future, urban-gro is anticipating this will lay the groundwork for using artificial intelligence to learn when controls need to be adjusted based on the monitoring. Droller hopes to see the data from environmental conditions mapped with yield and by strain type, which could allow for ultra-precise breeding based on environmental conditions. “As we add more and more data and develop the platform further, we can deliver some elements of AI in the future, with increased controls and more scientific data,” says Droller.

Applications for Tissue Culture in Cannabis Growing: Part 1

By Aaron G. Biros
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Dr. Hope Jones, chief scientific officer of C4 Laboratories, believes there are a number of opportunities for cannabis growers to scale their cultivation up with micropropagation. In her presentation at the CannaGrow conference recently, Dr. Jones discussed the applications and advantages of tissue culture techniques in cannabis growing.

Dr. Hope Jones, chief scientific officer at C4 Labs

Dr. Jones’ work in large-scale plant production led her to the University of Arizona Controlled Environment Agriculture Center (CEAC) where she worked to propagate a particularly difficult plant to grow- a native orchid species- using tissue culture techniques. With that experience in tissue culture, hydroponics and controlled environments, she took a position at the Kennedy Space Center working for NASA where she developed technologies and protocols to grow crops for space missions. “I started with strawberry TC [tissue culture], because of the shelf life & weight compared with potted plants, plus you can’t really ‘water’ plants in space- at least not in the traditional way,” says Dr. Jones. “Strawberries pack a lot of antioxidants. Foods high in antioxidants, I argued, could boost internal protection of astronauts from high levels of cosmic radiation that they are exposed to in space.” That research led to a focus on cancer biology and a Ph.D. in molecular & cellular biology and plant sciences, culminating in her introduction to the cannabis industry and now with C4 Labs in Arizona.

Working with tissue culture since 2003, Dr. Jones is familiar with this technology that is fairly new to cannabis, but has been around for decades now and is widely used in the horticulture industry today. For example, Phytelligence is an agricultural biotechnology company using genetic analysis and tissue culture to help food crop growers increase speed to harvest, screen for diseases, store genetic material and secure intellectual property. “Big horticulture does this very well,” says Dr. Jones. “There are many companies generating millions of clones per year.” The Department of Plant Sciences Pomology Program at the Davis campus of the University of California uses tissue culture with the Foundation Plant Services (FPS) to eliminate viruses and pathogens, while breeding unique cultivars of strawberries.

A large tissue culture facility run in the Sacramento area that produces millions of nut and fruit trees clones a year.

First, let’s define some terms. Tissue culture is a propagation tool where the cultivator would grow tissue or cells outside of the plant itself, commonly referred to as micropropagation. “Micropropagation produces new plants via the cloning of plant tissue samples on a very small scale, and I mean very small,” says Dr. Jones. “While the tissue used in micropropagation is small, the scale of production can be huge.” Micropropagation allows a cultivator to grow a clone from just a leaf, bud, root segment or even just a few cells collected from a mother plant, according to Dr. Jones.

The science behind growing plants from just a few cells relies on a characteristic of plant cells called totipotency. “Totipotency refers to a cell’s ability to divide and differentiate, eventually regenerating a whole new organism,” says Dr. Jones. “Plant cells are unique in that fully differentiated, specialized cells can be induced to dedifferentiate, reverting back to a ‘stem cell’-like state, capable of developing into any cell type.”

Cannabis growers already utilize the properties of totipotency in cloning, according to Dr. Jones. “When cloning from a mother plant, stem cuttings are taken from the mother, dipped into rooting hormone and two to five days later healthy roots show up,” says Dr. Jones. “That stem tissue dedifferentiates and specializes into new root cells. In this case, we humans helped the process of totipotency and dedifferentiation along using a rooting hormone to ‘steer’ the type of growth needed.” Dr. Jones is helping cannabis growers use tissue culture as a new way to generate clones, instead of or in addition to using mother plants.

With cannabis micropropagation, the same principles still apply, just on a much smaller scale and with greater precision. “In this case, very small tissue samples (called explants) are sterilized and placed into specialized media vessels containing food, nutrients, and hormones,” says Dr. Jones. “Just like with cuttings, the hormones in the TC media induce specific types of growth over time, helping to steer explant growth to form all the organs necessary to regenerate a whole new plant.”

Having existed for decades, but still so new to cannabis, tissue culture is an effective propagation tool for advanced breeders or growers looking to scale up. In the next part of this series, we will discuss some of issues with mother plants and advantages of tissue culture to consider. In Part 2 we will delve into topics like sterility, genetic reboot, viral infection and pathogen protection.