There are a lot of risks throughout the entire supply chain in the cannabis and hemp markets. Legal and regulatory issues, quality control reliability, security problems, product safety, potency, and constantly changing supply and demand are just a few major risks cannabis operators must stay on top of. A lot of companies mitigate these risks by implementing programs to find the source and figure out what actions could alleviate it. Those actions can look like reviewing testing or certification reports, auditing supplier facilities, and much more.
Jennifer Lott, AMAS Service Delivery Director for the standards certification body, BSI, has over 25 years of experience in quality, safety, lab management, consulting, packaging, and systems development. She’s an expert in GMP, ISO 22716, 21 CFR 117, 21 CFR 111, 21 CFR 210-111, ICH Q7, WHO GDP, RSPO, food safety, GMP/HACCP and much more.
She is a panelist for an upcoming webinar, Supply Chain Risks in Hemp and Cannabis June 27, 2023. During that webinar, she’ll join other experts where they’ll discuss some of the supply chain risks cannabis companies face and what they can do to mitigate those risks.
Ahead of her webinar, where she’ll take a deep dive into supply chain risks, we sat down with Lott to get a preview for what she’ll talk about.
Q: What are the major supply chain issues faced by the cannabis and hemp markets currently?
Jennifer Lott: The U.S. market remains highly complicated for cannabis companies and investors. Fewer than half of U.S. states and territories have legalized recreational cannabis use as of Nov. 2022.
To this day, cannabis is still a Schedule one substance under the Controlled Substances Act, alongside drugs like heroin, LSD and ecstasy – an issue that has led to several regulatory and fiduciary challenges for growers, processors, and distributors of cannabis/hemp.
Legal concerns aside, cannabis companies operate much like other businesses and face almost the same exposures that most enterprises do. Here are the top risks cannabis businesses encounter, according to experts.
Distribution – Current regulations prevent products from one state to be transported to another state.
Natural disasters – including wildfires, storms, and flooding, can easily damage crops
Cybersecurity – Because of the type of information that cannabis companies handle, they can also become a prime target for hackers.
Despite the supply chain challenges mentioned above, the cannabis industry is growing, and its use is becoming more accepted in society, but still faces major challenges. These trends also will create a volatile and fast-changing environment cannabis companies in 2023. The big challenge will be deciding which of the scores of startups, IPOs and established cannabis companies can surmount the upheaval and succeed long term.
Q: How are companies mitigating risks and what tools are at its disposal?
Lott: Anyone involved in the cannabis/hemp business knows they need to manage their risk with a solid risk management plan.
The three biggest risks facing cannabis/hemp businesses aside from the supply chain issues mentioned above, include:
Employee theft – employees have easy access to the product, run cash registers at dispensaries, and generally know a lot about the inner workings of the company. Protecting against insider theft is critical for the business.
Product tampering – this can happen at any stage in the supply chain. Businesses whose products cause harm could be liable for injury and damages.
Compliance regulations – compliance varies from state to state and laws are frequently changing.
Thanks to regulatory uncertainty and limited access to tools other industries have access to, the cannabis industry likely will have an increased risk profile for the foreseeable future. This heightens the need for a structured, risk management approach. However, even with so many external factors out of its control, cannabis companies still can dramatically decrease risks by addressing internal strategies and processes.
Cannabis companies with effective, relevant, and well-documented risk management practices can better positioned to create and preserve capital, attract investment, and achieve long-term sustainable growth.
Jennifer Lott is speaking at the Supply Chain Risks in Hemp and Cannabis Webinar, taking place June 27 at 11:00 am EST. Click here to register.
About Jennifer Lott
Jennifer Lott is the AMAS Service Delivery Director for the internationally recognized standards certification body, BSI. Jennifer currently supports the quality and integrity of food and fast-moving consumer products. She is an accredited Lead Auditor and Trainer with over 25 years of experience in quality and safety, management system development, consulting, packaging, and laboratory management. Jennifer’s expertise includes GMP, ISO 22716, 21 CFR 117, 21 CFR 111, 21 CFR 210-111, ICH Q7, BRC GS Consumer Products, WHO GDP, EudraLex, BRC GS Storage & Distribution, BRC GS Packaging, BRC GS Agents & Brokers, RSPO, Food Safety, and GMP/HACCP.
Remember those heady days of the Green Rush a decade ago, when markets were small and it seemed everyone had a chance? Now it’s more of a mad rush to get some green in the form of investment capital.
The majority of states in the country now have some type of legal cannabis market. Businesses in those states operate in spite of regulations that are restrictive, confusing and make it very difficult to make a profit. Meanwhile, heavy tax burdens, differences in enforcement techniques and varying degrees of oversight are other factors that influence bottom lines in the cannabis industry.
Inflation also continues to be a prominent force across world markets. Sales of cannabis products have fallen as consumers adjust to inflation and post-COVID supply chain issues that are causing higher prices on necessary staples like food and gas. An oversaturation of cannabis flower is becoming a perennial problem in some states and another factor causing industry distress.
When cash flow slows to a trickle, companies of all sizes seek out investment funding to keep their momentum. But catching the eye of an investor group requires more than just sticking your hand out.
What Attracts Potential Investors?
A company is best positioned to attract those interested in cannabis investment opportunities when it appears serious about its growth plans. That means being well positioned with a solid upper-management foundation and so much the better if there’s an advisory board in place too. A company built with a diverse group of talent—ideally from consumer packaged goods companies—presents an attractive opportunity for investors.
Top-quality and industry savvy finance employees who maintain sound financial books and establish a solid banking arrangement are also important. If the company’s financial scenario is robust enough to provide confidence in case of an audit and the books are in good shape with auditable METRC logs investors will be far more inclined to put money on the line.
A cannabis company with full inclusion (or seed to sale) is often a smart choice for investment. The vertical integration of cultivation, processing/manufacturing and retail allows them to sell their own products while also stocking other brands’ products on the floors of their dispensaries. If their products are respected and the brand is held in high regard, even better. Similarly, a cultivation enterprise that can grow crops for multiple brands can also be very attractive. The ability to pivot and adjust production to reflect the market and consumer demands indicates a strong business foundation.
Despite the current headwinds and saturated markets, other chances for growth exist. When a local municipality finally decides to “opt-in” to adult-use cannabis sales, there’s opportunity for both established brands and startups. It’s a matter of being ready for those opportunities and having a plan to leap in whenever new licenses become available.
What Businesses Will Struggle to Attract Investment?
Culture is key here. Poor employee relations and weak cohesion across departments are indicative of deeper problems. Do people actually want to work for the business? Do they feel supported by human resources? A company with underdeveloped or non-existent workers’ compensation policies and a management team that is not respected by its employees is not going to look good in the eyes of potential investors.
Non-diversified cannabis businesses are also at a major disadvantage when seeking investors. Cultivators of one type of product or service are locked into a single operation geared to do one thing. Any changes to market whims or problems with the supply chain can wreak havoc on a business based around a single product.
Stick to Business Basics
The cannabis industry is unique, but the basics of running a business well enough for success still apply. Strictly adhering to the traditional methods that any successful organization follows is extra important in cannabis. Businesses that are active in their community and make a real effort to be involved will be held in higher regard by investors. They want to see cannabis businesses that are not just setting up shop to make a quick buck, but are dedicated to bettering their community. That indicates a relationship with customers that involves mutual respect and promotes business longevity and financial stability.
Anyone in cannabis will tell you that complex transportation and supply issues are stalling industry growth and impacting employers’ ability to hire teams for the critical roles that keep product moving on schedule.
Since the onset of COVID-19 in March 2020, global and domestic supply chains have suffered bottlenecks caused by ever-changing public health policies and ongoing materials and labor shortages. While the status of transportation as an essential business kept other essential sectors, such as cannabis and grocery, chugging along, the current situation is still challenging.
Transportation remains the biggest supply-side problem, with the American Trucking Association reporting a shortage of an estimated 80,000 truckers in October 2021. The Bureau of Labor Statistics also continues to report high numbers of job openings across supply-chain jobs such as warehousing and transportation.
Cannabis businesses, from multistate operators to distributors to delivery service startups, are hardly immune to these issues. In fact, they face the additional hurdle of restrictive federal regulations, including the illegality of transporting cannabis across state borders. For example, this stipulation means that the over-saturation of flower in California cannot be addressed in a naturally symbiotic manner by shipping to states whose markets demand more flower, such as Arizona and New Mexico.
In the aggregate, these challenges impact employers’ operational and logistics goals and diminish candidates’ interest to work in a highly scrutinized industry. Many trucking companies have found it a challenge to attract drivers. Low pay, grueling schedules, and zero-tolerance cannabis testing for drivers despite legalization have led to an exodus of truckers in the U.S. and Canada.
Despite these obstacles, cannabis employers can still embrace smart strategies to attract quality employees and create much-needed stability to thrive in the rapidly changing marketplace.
Cannabis, COVID & the Great Resignation
In recent months, when it seemed America was finally emerging from COVID’s long shadow, the Great Resignation dampened business optimism. Employee turnover hit cannabis hard—especially in California, where other challenges like a thriving illicit market, high taxes and wholesale price compression have impacted companies’ ability to operate smoothly. Transportation and supply issues compound the problems.
For example, even transporting federally legal hemp in California and elsewhere has its headaches. Our company’s trimmer certification course uses hemp for training purposes. We ship the hemp directly to students’ homes so they can participate in virtual training sessions. Although our company has certified that the course packet contains only hemp, the U.S. Postal Service (USPS) will not ship it, regardless of whether the delivery location is in or out of state. We therefore must rely on a private carrier to transport the course packets to class participants, which is more time consuming and costly
Staffing Strategies for Transportation & Supply Jobs
Cannabis employers have several traditional and non-traditional tools at their disposal to address transportation and supply-related staffing.
While standard ecommerce jobs are synonymous with turnover, here lies an opportunity for cannabis operators to differentiate themselves. This is the cannabis industry, after all, and plenty of individuals who might not normally be interested in the transportation or supply aspect of ecommerce, might be far more open to those types of roles if they know the jobs involve cannabis.
What can employers do to attract these more receptive candidates to their organizations? Hone in on workers who have a passion for the plant. In job descriptions, position cannabis messaging front and center and conduct outreach through LinkedIn groups and other social media platforms to groups and individuals that have a cannabis focus.
Salary and Benefits
These days, a competitive salary simply is not enough to entice the right employees. A solid benefits package goes a long way to establishing trust between employers and employees and provides employees with a level of comfort and reassurance that they are supported during these tumultuous times. For example, companies must prioritize healthcare benefits and consider including coverage for part-time workers on the supply side of the cannabis industry.
Bonuses are another great way to catch the eye of potential employees, but bonuses must be developed within a framework designed for retention. Cannabis employers who establish performance bonuses and loyalty bonuses also increase that ever-important aspect of trust within their companies.
A transparent and robust HR plan that addresses safety concerns—COVID and beyond—can affect employees’ comfort for certain supply or transport positions that may involve increased public exposure or enhanced personal safety risks. Be clear with employees about the system that’s in place to support them in the event of unforeseen emergencies or injuries.
Cannabis employers should also be aware of the importance of having compliance-focused internal transportation standard operating procedures and protections for employees. These policies can be a key factor in attracting both drivers and additional transport and supply experts from other regulated transport industries such as food, agriculture and pharmaceuticals. Candidates without a cannabis background will be more drawn to companies that provide a well-developed and safe infrastructure.
Smart Cannabis Staffing Solutions: The Time is Now
Federal cannabis legalization is coming, and with that nationwide sea change other issues in cannabis supply and transport will emerge. How will cannabis transport consolidate? Will the nation’s top carriers simply take over?
Regardless of what those answers might be, the need to embrace smart staffing solutions now is imperative. Providing a solid base wage with health benefits, and making it clear to current employees and job candidates that there’s an internal infrastructure of support—from HR to loyalty bonuses—is the best way to tackle the transportation and supply issues to position your company for future success.
Risk management is the process of identifying potential hazards, assessing the associated risk, then implementing controls to mitigate those risks. With Salmonella and Aspergillus being two of the leading causes of cannabis contamination that can occur throughout the supply chain, applying upstream risk management strategies can keep supplier contamination issues from impacting your products.
In recent months cannabis products have been recalled for Salmonella and/or Aspergillus contamination in several states, including California, Arizona, Michigan, Florida, as well as Canada. While the recalls impacted retail products, in most cases, the contamination occurred farther back in the supply chain, as evidenced by recalls that impacted several dispensaries or other sales locations.
For example, the November 2021 Arizona recall caused multiple establishments and dispensaries to recall product due to possible contamination with Salmonella or Aspergillus; the Michigan recall of an estimated $229 million in cannabis products due to “inaccurate and/or unreliable results of products tested.” While a lab lawsuit against the recall released some of the product to market, the companies faced significant impact – in both removing and returning the product.
While microbial contamination can occur throughout the supply chain, Aspergillus is ubiquitous in soil and the flower, leaves, roots of the cannabis plant are all susceptible to such contamination. The mold also can colonize the bud both during growing and harvesting. Salmonella can be introduced during growing through, untreated manures, direct contact with animal feces, or contamination of surface water used for irrigation. However, the plant matter also can be compromised during drying, storage and processing from environmental contamination.
Supply chain risk management. To prevent a supplier’s contamination issues from becoming your problem to deal with, each facility at each step of the chain should develop a supply chain risk management program to assess and approve each of its upstream providers. Following are 5 key steps to assessing and managing risk in your supply chain:
Conduct a hazard analysis. A complete supply chain assessment should begin with a hazard assessment of all the ingredients, products or primary packaging you receive. There are two essential steps involved in conducting a hazard analysis: that is the identification of potential hazards – considering those related to the item itself, as well as the supplier environment and process as well as item – and an evaluation to determine if each hazard requires control based on its severity and likely occurrence.
Evaluate the risks. Based on the hazard analysis, the next step is to determine the associated risk. As defined by the European Food Information Council (EUFIC), “a hazard is something that has the potential to cause harm while risk is the likelihood of harm taking place, based on exposure to that hazard.” For example, the higher the exposure, the higher the risk.
Ensure risk control. Once risk is determined, it is critical to ensure that it is being controlled, who is controlling it and how it is being done. Depending on the risk, that control may need to be conducted by the supplier, by you or even by a downstream customer.
Require documentation. No matter which step in the chain is controlling the risk, it is essential that all be documented with records easily accessible – including the controls, any out-of-compliance events and corrective actions. The adage, “If it’s not documented, it didn’t happen,” is very applicable here, particularly should a problem arise and an inspector appear at your door.
Use only approved suppliers. Implementation of the above steps enable the development of a supplier approval program focused on quality, safety and regulatory compliance. Use of only suppliers who have been assessed and found to meet all your standards will help to protect your product and your brand.
Salmonella and Aspergillus contamination can occur throughout the supply chain, but implementing a supply chain risk assessment and management program will enable you to determine where the greatest risks lie among your ingredients and suppliers, allowing you to allocate resources based on that risk.
Since early 2020, the pandemic has shined a spotlight on the global supply chain and its shortcomings. Supply and demand have changed so much and so quickly that it has fostered shortages and delays for many of the world’s goods.
Much of this crisis is due to manufacturing plants in countries like China working at half-capacity or being forced to shut down to curtail the pandemic. A lot of those shortages can also be blamed on companies with a lack of foresight, choosing to lower costs with thin inventories rather than keeping warehouses full.
The global supply chain crisis has impacted nearly every market on earth that relies on international shipping. Everything from clothing and turkeys to cars and computer chips is in short supply, causing prices and wait times to increase.
The cannabis industry is no exception; the supply chain crisis very much so impacts cannabis products getting to consumers. According to John Hartsell, CEO & co-founder of DIZPOT, a cannabis packaging distributor, the worst, when it comes to the supply chain affecting the cannabis market, may still be on its way. “Supply chain issues will continue to be challenging and may even become more challenging for cannabis companies over the next several months due to the holiday season coming up with many packages coming for Christmas, Hanukkah and other holidays,” says Hartsell. Many of those gifts arriving during the holidays are coming from overseas, which further exacerbates any current supply chain backlogs.
John Hartsell will be speaking on this topic and more at the Cannabis Packaging Virtual Conference on December 1. Click here to learn more.Adding to those issues even more is the Chinese New Year coming on February 1, 2022. “The Chinese New Year can often be a three-week downtime for manufacturing in China, causing even more significant delays,” says Hartsell. “Ultimately, these issues are only a problem for organizations that are incapable of planning a logistical timeline that meets demand.”
So how can cannabis companies get ahead of supply chain planning? Hartsell says they are working with customers to establish timelines up to eighteen months out to prevent any disruptions. “We need to stay hyper-focused on logistics, moving freight all over the world, to prevent issues that result from shortsightedness.”
With new markets coming online and legacy cannabis markets expanding, the cannabis supply chain is certainly maturing and this crisis may be kicking things into high gear. In states on the West Coast, distribution channels have expanded, rules have allowed for curbside pickup and delivery and a lot more ancillary businesses are supporting a thriving market.
Still though, the cannabis supply chain falls short in other areas, namely interstate commerce, with the federal government to blame for that. Hartsell expects to see some more interstate commerce in the coming years, and with that comes a much more sophisticated supply chain. He says using logistics software to manage supplies will be the key to continued success.
Flower continues to be the dominant product category in US cannabis sales. In this “Flower-Side Chats” series of articles, Aaron 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.
Audacious (OCTQB: AUSA) is an Aurora (TSX: ACB) spinoff formerly known as Australis Capital, Inc. They have focused on an asset-light expansion strategy whereby they leverage their expertise in designing cannabis facilities in exchange for favorable cost plus arrangements for a percentage of the facilities’ production.
We interviewed Marc Lakmaaker, SVP of Capital Markets at Audacious. Prior to joining Audacious, Marc worked with Terry Booth at Aurora. His background is in investor relations.
Aaron Green: Marc, how did you get involved in the cannabis industry?
Marc Lakmaaker: I was working for an investor relations agency. and one of my colleagues left and she had a cannabis client that I took over, which was Bedrocan, Canada. I started working with them. They were then acquired by Tweed, which became Canopy. The guy I was working with at the time at Bedrocan was Cam Battley, who then went to Aurora. As soon as he joined Aurora, he said, “I need some help.” So, I came in house and worked there until July 2019. When I left, I set up my own agency, but by that time, I’d been working with Terry Booth for a few years. Then, this past December, Terry got in touch with me and said he needed my help. It was after the concerned shareholders had won the shareholder battle around Australis and the rest is history. So, I’ve now been working with Audacious, which was Australis, since December of last year, roughly.
Green: Just quickly on Australis: So, Audacious is basically a spin off of Aurora, correct?
Lakmaaker: Correct. So, at the time, Aurora had a couple of US assets on its balance sheet, a piece of land an annuity through a company Michigan. We were listed on the TSX. We were going to list or had just listed on the NYSE and were arranging for loan facility with a syndicate of banks. They said, “even though these assets are dormant, you can’t have any US assets on your balance sheet.” So, we spun Australis off – a little bit how Canopy had spun off Canopy Rivers. But it was really the idea that Australis is going to become the foothold for Aurora in the US cannabis market because Aurora has back-in rights.
The management team was put in place and started making some investments in the cannabis space, but kind of drifted away, sort of more into FinTech. First, it was FinTech related to cannabis and then FinTech, full stop. That’s when the shareholders were like, “we don’t agree with this.” Then the proxy battle started in which the dissident shareholders, or the concerned shareholders, won overwhelmingly. The Board left. The management team left. A new management team was put in place, a new Board in place, and it was kind of a restart.
So, we feel like we’re a bit of a startup. But a very rapidly moving startup. We’ve done an incredible amount of work in just the last seven to ten months. There was a lot of housekeeping to do. A lot of stuff related to restructuring the company, dealing with the departing management teams, dealing with bringing new management, etc. There were some deals that had to be unwound… Housekeeping if you will.
Green: Australis went down the FinTech route. What are the plans for Audacious now?
Lakmaaker: We’ve already started. We pivoted right away. In early January, we announced two acquisitions. One of ALPS, and the other one of Green Therapeutics. ALPS is really what is enabling us to execute on our strategy. It’s a very different strategy. It’s an asset light model, because we figured out that in order to grow quickly in this market without spending huge amounts of shareholder money, you need to be able to get into markets in a capital-light fashion. ALPS is the world’s preeminent greenhouse design company. Not just greenhouses, but also indoor facilities. They’ve got a 35-year track record in fruits and vegetables. They’ve got an eight-year-plus track record in cannabis – and built some of the best facilities in the world. They’ve got a lot of IP.
The proof point of that is our relationship with Belle Fleur. It’s a social equity license holder in Massachusetts. We helped them build their facility. We’re not contractors, but we do the design and engineering. We help them with partner selection. We do the construction management. We bring in a general contractor. Then we do the commissioning, and optionally, post-commissioning services, making sure that the facilities are dialed in. In return for all that IP, because what people know that what they get at the end of it is high quality, consistent cannabis and very low operating costs, we ask our clients to dedicate a certain percentage of their canopies to grow with our cultivars. Those we will buy back on a cost plus arrangement and we use that to launch our brands into whatever jurisdiction.
So, in Massachusetts, we’re working with Belle Fleur. We’re getting 10% of their canopy. We’re buying it back at cost plus 5%. So, we don’t have to sink money into building the facility. We’re not carrying the cost of capital there. We’re also not paying wholesale prices. And these relationships are locked in for a long time. I can’t remember if it was five or 10 years. So, it’s a very, it’s a different strategy, but it’s not contrarian – it’s very de-risked, that allows us to launch into new countries.
Then for Green Therapeutics, we’ve got a number of award-winning brands like Provisions and Tsunami. We’re kind of phasing out GT Flowers and there will be something else in its place. We also acquired Loose, which caters to a younger demographic, with a high potency shot beverage line that is now for sale in California.
We also have a partnership with PBR, the Professional Bull Riders Association. There’s some statistics around that that just absolutely blew me away – 83 million permanent fans! That’s 25% of the US population. I think the average income is $70,000. That’s well above the national average and the general split is fairly even too; it’s 53/47, male/female. Proper American sport! They have hundreds of hours of exposure on CBS. They’ve got 2 billion imprints on social media. So, with PBR, we launched Wreck Relief, which has several recognized and approved pain products in the lineup.
Green: What markets are you in right now?
Lakmaaker: Right now we’re in Nevada with cannabis products. This is our home market where our head offices are in Las Vegas. We’re in California. We just bought a dispensary in San Jose that comes with a partnership with Eaze. On top of that, we’re operationalizing in Missouri and Oklahoma, and officially building in Massachusetts.
Then through ALPS because they does both cannabis and non-cannabis, we’re in a number of states. We’re looking to get more of the supply deals. We’re also doing a lot of vegetable facilities throughout the entire world. We’re in Europe, we’re in Asia, in the Middle and in North America, we build these facilities from the desert up to the Arctic.
There’s a big movement right now to produce food that is safe and has a smaller carbon footprint. So, our facilities are kind of inherently more sustainable. They use up to 95% less water, less labor, less energy, they are less prone to disease, crop failure, everything. And because you are local producing for local communities, you reduce the transport carbon footprint.
Green: What in your personal life or in cannabis are you most interested in learning about?
Lakmaaker: I really like the sciences. I’m a chemical engineer by training. I think what is going to take an incredible flight in the years to come is the application of medical scientific research that’s being done right now. To me, that’s fascinating because the cannabis plant is something special. It’s got such a broad utility that we know, anecdotally. I think we’re moving towards a world where we’re going to see a lot of breakthroughs on the medical side.
I’m very excited about the other end too – cultivation. I think tissue culture is going to play an incredible and important role.
Many experts agree that of all pests threatening the cannabis industry, rodents are the most dangerous. Not only do they chew on cannabis plants and ruin crops at an incredible rate, they also contaminate product with their urine and feces. Rodents post a serious threat to cannabis facilities at every level of the supply chain.
Rodents’ incisor teeth never stop growing; left untouched, a rat’s incisor teeth would grow 4 inches in a year*. For this reason, they must constantly gnaw on things around them to wear them down. Unfortunately for cannabis growers, the woody stalks of cannabis plants present a perfect target. The destructive power of rodents cannot be overstated – creatures that can gnaw through plastic, wood, aluminum, brick, cement and even lead will make very short work of cannabis crops.
The notion that growing cannabis indoors will protect it from rodents is a misconception. Their destructive gnawing power makes rodents highly adept at getting inside buildings. Rodents can enter a building through an opening as small as 1/4 inch, and they will use any means necessary to reach the food and shelter that a heated building provides. In addition to squeezing through minuscule openings, rats and mice can climb wires and rough surfaces, jump considerable distances and tread water for several days.
And once they are inside, it is already too late. Pest control experts worldwide agree that exclusion – the technical term for using physical barriers to prevent rodents from entering a building vs. trying to remove them once inside – is the safest, most effective approach to rodent control. This is because once rodents have gained entry, they will contaminate – and multiply – at an alarming rate.
In one year, two mice could potentially multiply into more than 5,000 mice and two rats could become 1,250. In that same year, a single rat can shed more than half a million body hairs, and a mouse can produce up to 18,000 fecal droppings. Rodents eat or contaminate at least twenty percent of the world’s food supply each year (according to the Indiana Department of Health) and carry diseases including rat bite fever, hantavirus, leptospirosis, salmonellosis, murine typhus, and even the bubonic plague. According to experts from Total Food Service, “Mice are known to frequently carry salmonella bacteria in their digestive tract, so salmonella can be easily spread through contact with rodent waste. This is true with marijuana [sic]edibles just as it is with other food products.”
Keeping rodents out of cannabis facilities is fundamental to protecting crops and products. The most common rodent entryways include exterior doors, open garage and loading dock doors, windows, air vents, fireplaces and at points where electrical, water, gas, sewer and HVAC lines enter the building. Rats and mice can also gain entry through tiny cracks in the foundation, by gnawing through the standard rubber and vinyl seals on most garage and loading dock doors, and beneath roofing tiles.
Consider the following exclusion best practices highlighted in The Mallis Handbook of Pest Control:
Safeguard your doors. Wooden doors are continuously vulnerable to the gnawing of rats. Sheet iron flashing should be installed surrounding the door, and any clearance below the door must be smaller than 3/8 inch. All doors should remain closed when not in use and be fitted with proven, specialized rodent-proof door sweeps.
Ventilator grills and windows should be protected with proper and proven exclusion materials, ensuring any voids or cracks are filled.
Defective drain pipes provide a transportation pipeline for rodents. A perforated metal cover should be cemented over the drain pipe, and any small openings surrounding the drain where it enters the building should be patched or filled with proven exclusion material.
Large sidewalk cracks should be sealed as these crevices allow rodents to access a building’s foundation, enabling them to more easily search for entry points. Foundation walls can be protected with barriers of metal, concrete, or brick around and below the foundation.
Circular rat guards should be placed around all vertical wires and pipes.
Ensure that cracked or broken roofing tiles are identified and replaced in a timely manner, and utilize proven exclusion material to fill any voids.
It’s also critical that only proven, rodent-proof exclusion materials be utilized to seal entry points. Caulk, mortar and spray foam offer almost zero protection against the gnawing power of rodents. Steel wool is often used for filling cracks and crevices, but will eventually rust and break down, rendering it useless against rodents. All exclusion materials should be made of stainless steel or other permanent elements.
Standard rubber door sweeps used for weatherization are not designed to withstand rodent gnawing, making the small gap beneath and around exterior doors a primary rodent entry point. Specialized rodent-proof door sweeps are fundamental to effective rodent exclusion. Xcluder’s Rodent-Proof Door Sweeps feature a core of Xcluder Fill Fabric – a blend of stainless steel and poly-fiber with sharp, coarse fibers that rodents cannot gnaw through – reinforced gaskets for a superior weatherseal and an extended rubber flap to create a flush ground seal against insects and other outdoor contaminants. Installing rodent-proof door sweeps is arguably the single most important step in protecting cannabis facilities from rodent infestation.
Sanitation is also important. Food products of any kind must be stored in sealed containers. Garbage should be collected frequently and stored as far away from the building as possible. Clutter should be avoided in storage areas as crowded shelves and boxes create opportunities for rodent nesting. Roofs and gutters should be free of debris as standing water attracts rodents as well. All trees and landscaping should be trimmed back away from the building to prevent not only rodent burrowing but also access to the roof.
Rodents are not easily deterred, but a well-supported, thorough exclusion plan is the strongest weapon in the fight against rodents. Investing the time and resources to properly safeguard buildings against rodents before a problem is identified is the best way to protect the plants, products and personnel inside cannabis facilities.
Earlier this year, the Colorado Department of Public Health and Environment (CDPHE) announced a plan to introduce new testing rules for the state’s growing hemp industry. Under the new regulations, hemp products must be tested for residual solvents, heavy metals and pesticides, in addition to making sure they contain less than 0.3% THC.
The CDPHE are planning on a gradual rollout to prevent any supply chain issues or a lab testing bottleneck, similar to what we’ve seen in other states launching new testing requirements in years past, such as Arizona or California. Well, the Colorado rollout appears to be hitting similar snags and because of supply chain issues related to instruments and consumables in laboratories, the implementation of those testing rules is somewhat delayed. What was originally supposed to be implemented over the summer was pushed back to an October 1 deadline, and that deadline has now been pushed back to 2022.
As a result of supply chain shortages and the learning curve to test for such a wide range of pesticides, Colorado is opening hemp testing to out-of-state labs in an effort to stay on schedule with the rollout. Dillon Burns, lab manager at InfiniteCAL, a cannabis testing company with locations in California and Michigan, just completed an audit with the CDPHE in their work to get certified and start conducting hemp testing for businesses in Colorado.
Burns says they’re well-acquainted with the list of pesticides because of how similar the list is to California’s requirements. “For the pesticide testing rules that were supposed to go into effect on August 1st, it’s basically the same list as California just with slightly different action levels,” says Burns. “I would say these action limits are generally stricter – they have much lower LOQs [limits of quantification].”
Come January 1, 2022, they are expecting an additional 40 pesticides to be required under the new rules. “But currently, it’s still unclear when these regulations will actually go into effect,” says Burns. The full pesticide testing list is currently slated to be implemented on April 1, 2022.
The supply chain issues referenced above have a lot to do with what the state is asking labs to test for. Previously, most of the pesticides tested for under Colorado’s adult use and medical cannabis programs could be analyzed with an LC/MS. A handful of pesticides on the new list do require GC/MS, says Burns. It’s entirely possible that a lot of labs in Colorado just don’t have a GC/MS or are in the process of training staff and developing methods for using the new instrument. “Cleanliness of these instruments is such a priority that it takes time to acquire the right skill set for it,” says Burns.
The new testing rollout isn’t just another compliance hurdle for the cannabis industry; these rules are about protecting public health. Dillon Burns said he’s seen hiccups in California with the amount of new hemp farmers getting into the space. “The hemp products we’ve tested in California often fail for pesticides,” says Burns. It’s a lot easier in most states to get a license for growing hemp than it would be for growing adult use cannabis. “You’ll see a lot more novice growers getting into hemp farming without a background in it. They’ll fail for things they just haven’t considered, like environmental drift. We see a lot of fails in CA. Hemp is bioaccumulating so it presents a lot of problems. If they’re not required to look for it, they weren’t monitoring it.”
When asked how the market might react to the new rules, Burns was confident that Colorado knows what they’re doing. “I don’t anticipate that [a testing bottleneck] happening here. The regulators are reasonable, supportive of the industry and opening it up to out-of-state labs should help in preventing that.”
In this “Flower-Side Chats” series of articles, Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses integrate innovative practices to navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.
4Front Ventures Corp. (CSE: FFNT) ( OTCQX: FFNTF) is a multi-state operator active in Washington, Massachusetts, Illinois, Michigan and California. Since its founding in 2011, 4Front has built a reputation for its high standards and low-cost cultivation and production methodologies earned through a track record of success in facility design, cultivation, genetics, growing processes, manufacturing, purchasing, distribution and retail. To date, 4Front has successfully brought to market more than 20 different cannabis brands and nearly 2,000 unique product lines, which are strategically distributed through its fully owned and operated Mission dispensaries and retail outlets in its core markets.
We interviewed Andrew Thut, chief investment officer of 4Front Ventures. Andrew joined 4Front in 2014 after investing in the company in 2011. Prior to 4Front, Andrew worked in investment banking and later moved on to public equity where he was a portfolio manager at BlackRock.
Aaron Green: How did you get involved in the cannabis industry?
Andrew Thut: I came at it from the investment side of things. I started my career as a junior investment banker right out of school and then I was a public equity analyst and Portfolio Manager. I ran small-cap growth portfolios for BlackRock where I was on the team for a better part of 11 years.
One of my friends, Josh Rosen, who came from the finance industry, got interested in the cannabis industry really in 2008. He founded 4Front as a consulting company officially in 2011 and I came in as an investor. After that original investment, I left BlackRock and I was looking for something different to do. I was tired of chasing basis points and running public market portfolios. Josh said to me “This industry needs more talent,” and I became more and more involved at 4Front as the years went on. In 2014, I came into the business full time. Originally, I was someone that was kind of the gray hair in the room when we were applying for licenses. We had to go to different municipalities and convince them that we were going to be responsible license holders. I also spent a lot of time on the capital raising side for our business leveraging my career in corporate and more traditional public finance. These are incredibly complex businesses that require a fair amount of capital in some places. So, that’s how I originally got into the business.
These are complicated businesses in a lot of cases. The “sausage making” in cannabis is incredibly complicated. There’s friction at every step along the way. As an example, when you’re buying a building where you want to cultivate your product, you can’t get a mortgage from a typical bank.
While those of us that have been in the industry like to gripe and complain about it, this friction is also the opportunity. Because more traditional investors can’t invest in this industry yet, it allows us more time to build our businesses and have some protective moats around it from a competition standpoint until those folks do come in. So, all this friction is a pain and it’s brutal, but it’s also the opportunity here in cannabis.
Green: Can you speak to the transformation of 4Front from consulting to MSO?
Thut: The original business was consulting. Our original investor was sensitive about touching the plant – it’s one thing to offer services to a federally illegal business, it’s another thing to directly run a federally illegal business. For example, 4Front would have consulting clients that were interested in acquiring a license in Massachusetts. Because of our expertise and our standard operating procedures, we could apply for licenses in limited license states on behalf of our clients and help them show regulators competence and give the regulator’s confidence that these operators knew what they were doing. So, we would help our clients win the licenses and then once those licenses were won, our operations folks would come in and help them get up running.
When I came into the business we said, “well, geez, we have quite a track record helping clients win licenses and get open. If we’re good at winning these licenses and getting them open, why aren’t we just doing this on our own behalf?” So, in 2015, we shifted the business from consulting to being a multi-state operator. We leveraged our capabilities in regulatory compliance and winning licenses to go and get those on our own behalf. We also leveraged our financial expertise in M&A to add to our portfolio, so what we ended up with was a seven-state portfolio at the time.
Green: Chief Investment Officer is an uncommon title, even in the MSO space. What does your day-to-day look like?
Thut: I spend an awful lot of time helping management plot our strategy, and then figuring out how we are going to pay for our growth. Not only structuring finances for the company, but also having contact with our existing and new investors.
I spend a lot of my day to day thinking about where we want to be as a business and what geographies we want to be in. If you look at cannabis longer term, we have less interest in being cultivators or farmers. We think that’s going to be the most quickly commoditized piece of the value chain. We like retail as a business, but I think that we have less interest in managing hundreds of retail locations scattered across the country. We ultimately want to be a finished goods manufacturer. What we think is going to matter longer term is establishing low-cost production.
There is a lot of price elasticity in the end markets for cannabis meaning if you get customers a quality product at a much better price than the competitor, you’re going to take outsize market share. To offer that lower price, you have to be efficient. Over the years, we have figured out how to bring the labor cost out of our production. We have 25 different brands with 1000s of different SKUs of products that have dominant market share in states like Washington. And we’re now putting them into Illinois, Massachusetts, California, Michigan, and hopefully New Jersey.
Green: Do you have a preference towards acquisition, or do you seek growth through internal investments?
Thut: We are always weighing build versus buy. We want our products to have dominant market share, or very strong market share in every state we are in, and we have a lens towards what gets us there faster and most efficiently. For instance, we have two cultivation facilities and one production facility here in Massachusetts – about 15,000 square feet of canopy in the state. That will just about serve our three retail locations in Massachusetts.
Back to our bigger investment thesis, we believe that we should be a finished goods wholesaler in every state that we’re in. We know our products are incredibly well received and we know that consumers love our price point. In Massachusetts, for instance, we’re currently evaluating if we need more capacity from a cultivation standpoint and a production standpoint. And if we do where do the lines cross in terms of whether we should build versus buy that additional capacity?
We are currently in five states, including our facility in Washington has dominant market share in one of the toughest markets in the world for cannabis – somewhere close to 9% market share in Washington. Our brands are in the top 10 of every single category from flower to vapes, to edibles everything across the board. And what we’re doing our strategy is simple. It’s taking those tried-and-true products and operating procedures that have been so effective in Washington, and we’re replicating them in other states where we have licenses: Massachusetts, Illinois, and Michigan, California and hopefully New Jersey. We’re looking for more state, but we want to be deep in the states we’re in.
We also have a lot of confidence that you know, having been having translated some of these, having been able to effectively take our Washington success story and port it to other states. We’re looking for other states to sort of bring into the portfolio because we feel like we’re in a position now to stamp it out.
At our facility in Washington, which is the number one edibles manufacturer in that state, we produce the edible Marmas which is our the number one selling gummy in Washington. We produce 3,500 boxes of those in one shift using 25 people in Washington. Our facility is one of the lowest cost producers in the country.
We are opening what we think is going to be a very disruptive facility in Southern California right now. The facility is 170,000 square feet of purely automated finished goods production. So, rather than making 3,500 boxes of our gummy squares in one shift using 25 people, with the automation that we have in California, we can make 30,000 boxes. So, 10x one shift for the same number of people. We look more like the Mars Candy Company than most investors would think of when they see a typical cannabis company. We’re bringing that kind of scale and automation.
Green: What are some of the industry trends that you’re watching closely?
Thut: We keep a close eye on limited license states. States like Massachusetts and Illinois. For various reasons Massachusetts is very tough to get zoned. So, there’s going to be a limited number of players in a state like Massachusetts, which means you can have pretty good moats around your business and pricing will hold up over several years. We love limited license states like that, where price is going to hold up. On the other hand, we’re not afraid to enter a state like California where we think our low-cost production expertise uniquely qualifies us to go into a huge market like that and be disruptive and take a lot of the pie.
“You’re starting to see the market expand. There’s some anecdotal evidence that we’re taking a fair amount of share from the beer industry.”What we’re seeing in terms of industry trends, particularly on the THC side of this business, has just been phenomenally strong. You’ve had robust medical markets where, by and large, we’re seeing those dominoes start to fall quickly and going recreational. When that happens, the size of the market increases – call it from 2% of the population to as much as 10% of the population. So, from a state regulatory standpoint, having states go form medical to adult use is a huge deal in terms of the market opportunity.
We’re also seeing states get a lot more comfortable with the idea of selling cannabis. I’ve been around for close to seven years in this industry. When I started and I went into a municipality, and I said we wanted to open a cannabis store you’d have people following me to my car with pitchforks. As these municipalities open and public acceptance comes around, people are realizing that these stores are providing jobs and providing a good tax base for communities. So, the acceptance of cannabis has a snowballing effect that just continues to roll.
It’s not just the ultra-frequent users of cannabis who are totally driving the bus in terms of the demand growth for your business. You’re starting to see the market expand. There’s some anecdotal evidence that we’re taking a fair amount of share from the beer industry. So, the fundamentals of this industry are phenomenal. I think that we’re probably in the second inning of what is a mega-trend of legalization of cannabis and the investment opportunity here.
Green: I think one of the interesting things about the fundamentals is you’ve got this hardship of 280E, that all the companies are facing, and yet you still have groups that are surviving, profitable and growing. What are your thoughts on 280E’s effect on cannabis businesses? Do you foresee anything happening there?
Thut: There was a huge liquidity crunch in cannabis in 2019, meaning it was hard for people to come up with capital to grow their businesses. You had a bunch of companies that had licenses who didn’t really know how to operate and weren’t really focused on profitability. That liquidity crunch of 2019 made people get religious about being profitable and being efficient with capital allocation. Fast forward to 2021 and if you look at the top 10 cannabis MSOs in the US, I think we’re all profitable.
So, here you have an industry with accelerating top line growth and they’re already profitable. That profitability should only improve as you’re able to leverage your operating expenses and that’s a unique thing. When the internet craze was started in 1999 you had companies that a weren’t profitable, didn’t have business models, and no one really knew what they wanted to be. You have companies here in cannabis that are growing the top line 50% a year, and they’re profitable, and they’re trading at under 10 times EBITDA, which is totally disjointed.
So, that leads me to your question on to 280E. 280E has been a problem. Banking has been a problem. Having to list our companies over the counter instead of on exchanges like the NASDAQ and NYSE – that’s been a problem in terms of attracting capital. But the good news is Senator Schumer, Senator Booker and others have put out some bold initiatives on what they want to achieve from a legalization standpoint. From an investment standpoint, the biggest thing that investors should be focused on is access to banking, which is included in the senators’ proposed legislation.
Once we get access to banking services, the federal government is basically acknowledging cannabis as an industry will be able to not only have more traditional financing for our growth, but it will also lead to uplift into exchanges and real institutions like the Fidelity’s and the BlackRock’s of the world being able to come and invest in these companies. It also acknowledges 280E is an antiquated law. Getting rid of 280E will give us a much lower tax rate and will allow us to have a bigger proportion of our pretax cash flow into growing our businesses rather than having to go outside for that funding. My crystal ball is probably no better or worse than others in the industry, but if you fast forward 18 months to two years, I have a tough time seeing 280E still in place.
Green: Last question here. What’s the thing you’re most interested in learning about in the cannabis industry?
Thut: I’m just fascinated to see how these various business models will play out. People are placing bets on picks and shovels. People are placing bets on whether being a finished goods manufacturer works. People are placing bets on whether a retailer business model is going to win the day.
If you look at the leadership in the cannabis industry today, it’s totally different than it was four years ago. People that were foregone winners four years ago like MedMen had to do significant recaps. I put Acreage in that sort of bucket too. The leadership had shifted and so I’m really curious to see just from an intellectual standpoint, how this business evolves.
I sometimes scratch my head, you know, do you really want to be a cannabis company with 200 retail locations? You’re going to have a tough time growing same store sales in three to five years in 200 retail locations. So, I’m just most curious in proving out our thesis of being finished goods producers and low cost finished goods producers in the value chain. I’m most curious in seeing how that plays out. I think we are seeing our strategy play out in the most competitive markets in the world. We have a high degree of conviction that we’re on the right track here, but our eyes are always open and we’re always making little pivots here and there trying to make sure to stay on top of the sweet spot in the value curve.
If you describe the cannabis industry generically and you didn’t say cannabis, you said “widget” I think it’s the most fascinating Business School case ever presented. If you’re taking this market that already exists, it’s just illegal. So, all it needs to do is switch from the black market to the legal market and then you’re always trying to plot a course and steer the ship towards where the highest value creation can be. So, I’m fascinated to see how it’s going play out here.
Green: That concludes the interview. Thanks Andrew!
As an experiential marketer that works with a lot of vice-oriented brands, I’ve always been fascinated by the story of the rise of spirits in the US – a history marked by ingenuity in the face of heavy restrictions, clashing social norms, crime and political ideals. Since then, those same qualities have emerged in the story of cannabis and how, against all odds, it has recently begun to push its way into the mainstream. But on the path to legalization, cannabis can also learn a lot from the spirits industry about what not to do.
For example, when laws governing the spirits industry were written in the post-Prohibition 1930s, the federal government wanted to create an equitable landscape. So, they created a 3-tier system – manufacturers or importers must sell to wholesalers, wholesalers must then sell to retailers and retailers sell to us. They figured that keeping manufacturing interests separate from wholesale and retail interests would keep any large company from owning an entire supply chain, muscling out smaller competitors.
In theory, it’s not a bad idea. Imagine the consequences of massive companies like Diageo or AB InBev using their money to pay bars and liquor stores to only stock their brands and not competitors. Add on the Tied House Laws, which basically says an entity in one of the three categories cannot have an ownership stake in any of the others, and you get a seemingly even-handed marketplace.
In truth, it makes it almost impossible to be disruptive or for new brands to break through. Other industries have innovated by cutting out the middleman and selling direct-to-consumer – something that simply cannot happen in alcohol (minus the wineries and distilleries that can sell direct out of their tasting rooms). Also, now distributors are so consolidated that there are only one or two big distribution companies in each state. So, as a company trying to bring a new product to market, you have to get into one of these highly selective and competitive distributors if you are going to be successful – a challenging ask for a small, independent brand.
Now, imagine that same challenge coming to the cannabis space. With legalization around the corner, the adult use (as opposed to medical use) cannabis industry could easily look like alcohol in the rules that will be set up.
Right now, adult use manufacturers can sell their products to dispensaries directly. Some use a distributor, but there is no nationwide mandate to – which is probably for the best. If a distributor isn’t a requirement, it forces brands to offer something new to differentiate themselves. It will spark innovation, rather than add an extra profit margin that will get rolled into the final price – a price that is already higher than it should be due to the murky federal legal status. Adding complexity and cost will only make it harder to compete with the illicit market. For the industry to grow, costs for illicit cannabis can’t be lower than its legal counterpart.
Of course, we are in the nascent stages of legalization here and we’ve come a long way culturally and technologically since the 30s. But remember, the rules governing alcohol were written nearly 100 years ago along with the passage of the 21st amendment repealing prohibition. Startlingly, those laws haven’t changed that much since they were written, so any mistakes made now in dealing with the cannabis industry could last for a long time.
A new way forward
What the cannabis industry needs is a new model for the adult use/recreational space, keeping some of what exists in the alcohol industry but without ever mandating use of a distributor – the middle tier. This would mean keeping Tied House Laws in place and applying them to cannabis so that a manufacturer could never hold an interest in a retailer, while still allowing them to sell directly to dispensaries and to consumers. Currently, some states allow for vertical integration, which would change under Tied House Laws.
This should be pretty simple, since most states are already separating licenses by type of activity (manufacturer, retailer, etc.) and it would promote competition while bringing the widest array of products possible to each consumer. Also, it would prevent any behemoths from squeezing out the up and comers.
Of course, some retail license allowances could be considered on a case-by-case basis. For example, I would carve out an exception that growers/manufacturers could sell direct to consumers through a single “tasting room” at their brand home. This is similar to the operations of microbreweries, distilleries and wineries. It would encourage education for consumers, and provide great opportunities for brands to show why their products are better or unique.
Given the technology and logistics solutions available to businesses in a 21st century economy, mandated distributors create a sometimes-unnecessary barrier to an already efficient supply chain. If mandated, prices will inflate to cover added margin, thus making it harder to bring consumers over from the legacy market to the legal one. I’m not against the idea of a distributor – they can add tremendous value, but the mandate would seriously curtail industry growth.
Direct-to-retail and direct-to-consumer sales are necessary for the economic health and growth of the industry. Without this, using alcohol as a cautionary tale, at some point the middle tier cannabis brands will inevitably begin to wield an outsized amount of power. We are living at a time where innovation is going to be the key to explosive growth in the cannabis industry, so it’s important to do everything possible to let the market find its way without falling into a century-old trap.
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