MARCH 201 7
California State of Disruption
2017 Brings New
Regulations to California
Harvesting the Cash in Cannabis
Coachella Valleyâ€™s Future is Green Indeed
5 Things to Know
BEFORE YOU GROW
SPEEDWEED We Bring It
IN THIS ISSUE 04 From the Editorâ€™s Desk 18 When is a Licensed Distributor Legally Required in California?
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S P E C I A L F E AT U R E S 06 Mayors Vie for Cannabusiness in Coachella Valley 12 Californiaâ€™s Tidal Wave of Local Regulation
22 Time to Scale: How to Raise Money for Your Marijuana Business
28 Historical Irony: Marijuana Industry Taking Ride on the Laffer Curve
24 Australians Ready to Invest in U.S. Marijuana
32 More than Just a Good Idea: Movers and Shakers in Cannabis Technology
38 Michelle Reefer Unlocks the Colors of Cannabis 48 Marijuana Industry Awards 2016 52 Branding in State-Legal Cannabis
42 Extracting Opportunities in Cannabis Concentrates
FROM THE EDITOR'S DESK
The Disruptor State: THE Cannabis Catalyst for Change
ixteen years ago, Malcolm Gladwell wrote a best-seller called “The Tipping Point.” The book expounded on the theory that little things do indeed make a difference and it takes only one “little thing” to tip the scales and effect change in previously unforeseen ways.
There have been many little things that have changed the
legal cannabis industry, but the tipping point may indeed be the November 2016 elections, which saw adult-use legislation approved in Maine, Massachusetts, Nevada and what is likely to be the largest cannabis market in the world — California. They join Alaska, Colorado, Oregon and Washington, which already had legalized adult use. With more states adding in medical cannabis statutes, November 2016 was a good election season for the plant. As the first state to legalize medical cannabis, California historically is the disruptor state and the catalyst for change. The rest of the country — and indeed the world — will be looking to California to set the standards for best practices in adult use. As goes California, so likely will go the nation. The industry has a tremendous opportunity before it. Building strong companies with best practices that add jobs and contribute positively to local economies will go a long way towards legitimizing the industry and building support for further legalization. More entrepreneurs and more investors are entering the space with creative ideas and the ability to execute. In the past few months the Toronto and Australian stock exchanges have seen an increase in the number of cannabis companies either listing or beginning the process, which moves cannabis investing into the public realm. Let the disruption begin!
Kristin Fox Editor-In-Chief Co-Publisher
Randy Shipley & Kristin Fox EDITOR IN CHIEF
Kristin Fox MANAGING EDITOR
Caroline Cahill CONTRIBUTING EDITORS
Cultivation - Josh Browning Legal – CannaRegs/Amanda Ostrowitz Regional - Jon Slotnick Medical and Extracts - Anne Wallace Investing - Christopher Faille Technology - Jen Knox DIGITAL EDITORS
William Sumner Colin Burch Amanda Taylor (Intern) DESIGN AND PRODUCTION
Picante Creative SALES
Robb Erwin Michelle Salser GENERAL INQUIRIES, SUBSCRIPTIONS & ADVERTISING INFORMATION
Randy Shipley, President MJIC Media firstname.lastname@example.org https://www.linkedin.com/in/shipleyrandy Marijuana Industry News, Vol. 1, Issue 2 14 Orchard Suite 200, Lake Forest, CA 92630 Marijuana Industry News is published by MJIC Media, a division of MJIC Inc. All materials in this publication are for educational and information purposes only and intended exclusively for states with legal cannabis markets. Marijuana Industry News assumes no responsibility for any claims or representations within the magazine’s content or its advertisements. Marijuana Industry News does not promote or condone the illegal use of any of the products within the publication. MJIC Inc. may hold positions in some of the companies covered and will disclose as appropriate. Copyright 2017 by Marijuana Industry News. Reproduction of this content, in whole or in part, without written permission from the publisher, is explicitly forbidden.
Mayors Vie for Canna-business in
By Jon Slotnick
Coachella Valley The “Emerald Triangle” in Northern California — Humboldt County, Mendocino County and Trinity County — has one of the largest concentrations of cannabis grow operations in the country. Competition to the south, however, is heating up, with several small towns in Riverside County’s Coachella Valley, about 120 miles due east of Los Angeles, courting the rapidly growing legion of cannabis cultivators. We recently interviewed three mayors from the region to discuss their respective town’s approach to canna-business development in the wake of the passage of Proposition 64, California’s recreational use bill.
Scott Matas, Mayor of Desert Hot Springs Desert Hot Springs, with approximately 30,000 residents, was the first city in California to green-light large-scale medical cannabis cultivation. The city approved it in November 2014, while restricting the grows to light industrial areas. Since then, the city has aggressively welcomed growers, with one large-scale operator already up and running a 9,600-square-foot facility, and three more large-scale operations scheduled to open in 2017. “Desert Hot Springs is known for its health and wellness,” said Scott Matas, the city’s mayor, who jokingly referred to his 2015 election win by a 63-vote margin as “a landslide.” “We have the purest water and Joshua Tree nearby. It’s a place where you have to find your way to. The opportunity for cannabis growers was here because we had developed certain areas of our land, and this was just a no-brainer once we looked at it.”
Early on, however, the city wasn’t always as welcoming to the industry. In 2007, someone opened an unlicensed dispensary and city officials quickly shut it down. “The guy rented a space and cut a hole in the door for security,” Matas said. In response, the City Council pushed through a moratorium on cannabis businesses within city limits. At the time, Matas himself was in favor of the ban, but since then his views have come full circle. “Around 2012, I was still stuck on the opposite side. I tend to be middle-of-the-road to conservative when it comes to social issues,” he said. That’s when the issue became personal, after the mother of Matas’ close friend was diagnosed with cancer, and medical cannabis was the best source of relief. “I started to look into it and do some research and visited some legal grows in Los Angeles. I discovered that it wasn’t the typical people you might think who were involved in the business. There were actually doctors and lawyers and people in business suits,” said Matas. In 2014, motivated in part by shifting cultural attitudes in favor of cannabis, and perhaps more so by a struggling city economy that triggered an official declaration of a fiscal emergency, the Desert Hot Springs City Council voted to legalize both medical cannabis dispensaries and cultivation. In October 2014, council members approved two ordinances to regulate and permit medical cannabis facilities, and in November, voters passed measures to create cannabis taxes for the sale and cultivation of medical cannabis within the city by a two-thirds majority. The measures also included prospective provisions for taxes if and when California legalized or decriminalized recreational use. The tax structure immediately began generating a revenue stream for the city, with permitted medical cannabis businesses required to pay a monthly 10% distribution tax on the proceeds from medical cannabis sales. According to Matas, there currently are six operating dispensaries within city limits, and 13 more either permitted or in process. Desert Hot Springs doesn’t have a specific cap set for the number of dispensaries allowed, but given the relative glut, Matas doesn’t expect the city to issue additional licenses. “We’ll let capitalism run its course to see which ones survive.” The real bread-and-butter tax windfall for Desert Hot Springs will come from cultivation facilities, which are charged an additional annual cultivation tax on the size of their cultivation space, at a rate of $25 per square foot for the first 3,000 square feet and $10 per square foot for any additional space. Candescent is one such facility already in operation. It opened for business in
September 2016 and company officials presented the city with a $135,000 tax revenue check later that month. Three months earlier, the Desert Hot Springs City Council unanimously approved the development of new cultivation facility by Black Pepper. Initial plans call for that company to establish a 40,440-square-foot facility, with 31,100 square feet dedicated to cultivation. And the biggest score of all for Desert Hot Springs may be right around the corner, with Oxford Properties earmarking 1 million square feet for cultivation over a 10-year span. With the passage of Proposition 64 and the increasing demand for cannabis, Matas is hoping that Oxford will advance the pace of development and try to reach its goal of 1 million square feet in five years rather than 10. For Matas, all of that is good news for Desert Hot Springs and its residents. “Right now our annual budget is around $15 million. We could double that in three years from cultivation taxes alone, and we still have about 2 million square feet available for cultivation.” Those funds will go a long way toward improving the city’s infrastructure needs, with Matas also hoping to increase the ranks of the city’s police force from 28 to 35 officers. As for competition from the rapidly growing industry in the Coachella Valley, Matas isn’t overly concerned. “I don’t see it as a huge problem. We actually have the largest amount of land available, and we’re all in the same ballpark in terms of taxes. Now if the city of Palm Springs decided to open up land for development then they might be competition, but we still have about 2 million square feet available.” While no one in the industry is immune to the shadow cast by federal cannabis statutes, Matas once again remains optimistic. “Of course we’re always a little worried about that, but Donald Trump is a businessman. There have already been so many states that have legalized and as long as people keep within their state guidelines I think we’ll be okay. I’m more worried about how the state will tax it, and how the federal government may eventually tax it.” Steven Hernandez, Mayor of Coachella Best known as home to one of the most popular music festivals in the world, Coachella is located 130 miles east of Los Angeles and 28 miles east of Palm Springs, with about 45,000 permanent residents. Well before Proposition 64 passed in November, the city’s 33-year-old mayor, Steven Hernandez, and the Coachella City Council were laying the groundwork to attract large-scale cannabis March 2017 |
growers in anticipation of legalization. “We were ahead of most cities in the area,” said Hernandez, a selfavowed “policy wonk” with a Master of Public Administration degree from the University of Southern California. “We’ve been at this since August 2015. We’re an agricultural community. We grow 120 different commodities, so for us this industry goes along with what we already knew. From the beginning we were looking at large-scale cultivation.” While political and popular opposition to cannabis concerns can sometimes prove insurmountable in many jurisdictions, Hernandez, along with other Coachella legislators, saw a golden opportunity to juice the local economy. “I’m a millennial mayor,” he said. “My views on cannabis haven’t been aligned with those of the great generation. I’ve seen how in the past cannabis has been demonized. I’ve always been supportive of cannabis for medicinal use, and when it was approved recreationally it aligned with our politics.”
Early in 2016, Coachella began positioning itself in anticipation of the passage of Proposition 64. In January, city officials passed an ordinance permitting cannabis cultivation and manufacturing in indoor lots of not less than five acres, in an industrial area zoned for auto wrecking. “One of the things that’s vital in this industry is that there is political will and political support, and the council was unanimously in favor,” Hernandez said. So too were a large majority of the city’s voters, who overwhelmingly approved a tax bill this past November aimed at incoming grow operations, with 83% voting in favor. “We’re using this industry to help redevelop an industry that’s declining — specifically in the auto wrecking zone, where people used to go to fix their cars.” Hernandez characterized that area as “plug-andplay” for cannabis production. “We can use the existing energy, water and sewer infrastructure. And where Desert Hot Springs has to deal with Edison,
we have a public utility that’s all in on these efforts.” In July 2016, city council members unanimously approved the first largescale operation — a 111,500-squarefoot cannabis cultivation and manufacturing plant proposed by Irvine, Calif.-based Cultivation Technologies, Inc., a company the city had been negotiating with since 2015. With CTI set to go into production in January 2017, the project includes two buildings, a research lab, four 22,000-square-foot cultivation fields and 9,000 square feet of manufacturing space. All told, it should generate an estimated 120 jobs. In addition to those jobs, the bottom line benefits to the city could ultimately prove to be quite substantial. As part of its deal with the city, Cultivation Technologies is expected to pay an estimated $4 million a year in taxes, which includes a maximum 6% gross receipts tax and a $1 million facility fee. Comparing that to the city’s entire budget of $22 million for fiscal 2017 provides an idea of how significant those canna-revenues are — and those numbers may prove to be just the tip of the iceberg.
The city already approved a second large-scale grow operation, which will be 17,000 acres when fully developed. Hernandez estimates that full buildout of the entire zone could eventually triple the city’s $22 million budget over time, although he acknowledges that would take “bull market, perfect storm” conditions. As for the increasing competition in the local area, Hernandez believes his city has one key intangible advantage. “Coachella is already an international brand and there are a lot of people who want take advantage of our name. The music festival had a lot to do with building the brand. When you think of Coachella, you think of the dessert and youth and energy. Companies want to be a part of that.” Right now, Cultivation Technologies will be spearheading that branding effort. As part of the deal negotiated with the city, the company intends to sell its medicinal cannabis products under the name “Coachella Premium Cannabis.” “We are dedicated to bringing economic development and opportunity to the City of Coachella through this project and our brand of cannabis and cannabis products,” said Justin Beck, president of CTI, in a company press release. Those products also will include extracts and ancillary items. Like everyone engaged in the burgeoning cannabis industry, Hernandez is aware of the ongoing threat from federal cannabis statutes, which continue to criminalize cultivation. The DEA under the Obama Administration has applied those laws erratically, occasionally opting to raid and shut down growers and manufacturers, absent any kind of uniform or concerted effort. Industrywatchers can only speculate what the new administration will do, but there’s reason for optimism. “If we agree with Donald Trump in any sense, we agree with state’s rights,” Hernandez said. “As with Colorado and Oregon and other states where recreational use is legal, we want those state rights to be respected.”
Cathedral City, Mayor Stan Henry Cathedral City is located about halfway between the wealthy resort communities of Palm Springs and Rancho Mirage, with its approximately 50,000 residents forming the second largest city in Coachella Valley. By 2014, three unlicensed dispensaries had opened there and then were shuttered by the city. A series of lawsuits challenging the closures began to pressure the city’s financial resources, so a divided city council decided that the best solution was to sanction and regulate dispensaries. On Nov. 4, 2014, Cathedral City voters approved Measure N, which sanctioned the establishment of up to three dispensaries, which are subject to a maximum sales tax of 15%. Until recently the cannabis market in Cathedral City had been slow to develop, with the permitting process taking up to six months to complete. By the end of 2016, dispensary sales in the jurisdiction had weighed in at a relatively light $350,000, with only four dispensaries in regular operation. In April 2016, however, after the city approved cannabis cultivation and other aspects of medical cannabis manufacturing, the pool of potential pot purveyors swelled dramatically. “It’s been like the early years of the
California Gold Rush. Everybody’s speculating,” said Cathedral City Mayor Stan Henry. According to Henry, since the cultivation ordinance was approved, the city has received a whopping 57 applications. “The biggest challenge has been processing them all, which has put pressure on our Planning Commission,” he said. In October, Linda Snowden, a member of the city’s Planning Commission, resigned as a result. “I feel it is completely irresponsible to open an unlimited number of these facilities without any study showing the potential negative impact to our city,” she wrote in her resignation letter. Some of that “green rush” fallout has affected Cathedral City’s existing retail community as well, where storefront space is limited. Demand from cannabis startups is beginning to drive up rent, threatening to price some businesses out of the market. “As the dispensaries need public storefront space, there’s been a major outcry from the business community about displacement,” Henry said. “And there’s still this fear of public perception. Kind of like I don’t want the strip bar next to my business.” Underscoring the problem was a lengthy article published in the local Desert Sun newspaper that covered March 2017 |
both Snowden’s resignation, and specific complaints from established business people about the influx of cannabis entrepreneurs. One store owner stated that people regularly walked into her store to take measurements of the interior, evaluating its potential for their canna-businesses. She also said that someone offered her $750,000 if she
would vacate her shop in nine months. Another store owner who has been doing business at the same Cathedral City location for two decades said, “We don’t know whether to start looking for a new location or not to start looking. I don’t like the uncertainty factor.” In late October, the City Council responded by enacting an emergency ordinance placing a 45-day moratori-
um on all new dispensary applications. That ban was extended in midDecember, with both passing on 4-1 council votes, giving the Council time to refine the dispensary ordinances. Significantly, the ban doesn’t affect applications already in the pipeline or those for other medical cannabis businesses, such as cultivation and manufacturing. While the permitting process and local development of industrial space for cultivation should work itself out over time, Henry — who previously served as Cathedral City’s Police Chief for 15 years — has another major concern. “My biggest fear is what is the federal government going to do? I kind of feel that we’re putting our business people in jeopardy. We’re creating a conflict for them, where they can be legitimately in business in Cathedral City but any day the federal government can come in. Especially with large-scale cultivation where the DEA has been enforcing. Are we placing those people in jeopardy?” Despite those reservations, Henry is determined to both uphold the city’s current statutes that permit cannabis cultivation and sales, while simultaneously serving the interests of existing business people. He thinks that one part of the solution may be opening up unused and undeveloped land for cultivation. “We’re looking at open space north of the I-10 freeway to create an area specifically for cultivation where you don’t need a storefront. There’s nobody out there right now. It’s all desert,” Henry said. The most current city statistics from October indicate that, in addition to the four operating dispensaries, another 13 conditional use permits have been approved — eight for cultivation and five for dispensaries. So far Cathedral City hasn’t issued any permits for manufacturing, although several are working their way through the permitting process. All those proposed locations involve vacant lots.
California’s Tidal Wave of Local Regulation
ocal governments in California have been formulating regulations for marijuana in response to the state’s regulations. In December 2016, more than 160 cities and counties held meetings related to marijuana laws and regulations. Tracking regulations at the local level is a critical key to analyzing potential business and investment opportunities.
Rulemaking There are several laws to know when dealing with local government rulemaking in California. The Brown Act is a law that requires cities to give 72 hours notice before a city council meeting, which may sound like a lot of time, but it’s only three days. Check city council websites and agendas constantly; otherwise, actions will slip past the inattentive — legal precedents will be set and ordinances adopted, so it pays to be vigilant. Note, Tuesdays are the most popular night for city council meetings in California. With the passage of the Adult Use of Marijuana Act on Nov. 8, 2016, several city councils passed interim urgency ordinances. An urgency ordinance has to receive four-fifths of a council vote to be adopted or extended. An urgency ordinance initially lasts 45 days, but it can be extended for an additional 10 months and 15 days and then once again up to an additional year. If a council adopts an ordinance through council action, it can be reversed by another council action or repealed or changed by a voter-approved ballot measure, i.e., an ordi-
| B y A m a n d a Ostrowitz, Cannaregs
nance adopted by a council is not permanent. A voter-approved ballot measure is far more permanent. The only way to reverse, repeal or change a voter-approved ballot measure is through another voter-approved ballot measure. When Gov. Jerry Brown signed the Medical Cannabis Regulation and Safety Act on Sept. 29, 2016, local law became extremely important to marijuana businesses because MCRSA has a dual licensing mandate — in order to apply for a state medical marijuana license, an applicant must have a local license. Everyone is focused on local law right now while awaiting the state’s regulations to be promulgated pursuant to MCRSA. AUMA doesn’t necessarily dictate that you need a local license, but it does say you have to comply with local law. While AUMA and MCRSA have different language, the reality is that they should likely sync up via a clean up bill or through regulations.
Local Government Regulation Under MCRSA, local governments are legally allowed to regulate or prohibit any and all commercial medical marijuana activities that will be licensed at the state level, prohibit all personal cultivation by patients and prohibit delivery from originating or terminating in their jurisdiction. Local governments are not allowed to prohibit a patient from using medical marijuana, nor can they prohibit deliveries from passing through the jurisdiction while in transit on public roads. Under AUMA, local governments are allowed to regulate or prohibit any and all commercial recreational marijuana activities that will be licensed at the state level, prohibit outdoor personal cultivation and
place reasonable regulation on both indoor and outdoor personal cultivation. Local governments are allowed to prohibit delivery from originating or terminating in their jurisdiction, but cannot prohibit deliveries from passing through their cities on their way to a destination in another jurisdiction, i.e., delivery drivers can use the roads in a city regardless of whether that city allows delivery. They are not allowed to prohibit adults 21 and older from possessing up to 28.5 grams of flower or 8 grams of concentrates, nor can they prohibit private consumption. Local governments can’t ban personal cultivation of six indoor plants; however, some cities, such as Galt and Elk Grove, have violated this provision by passing temporary urgency ordinances banning personal indoor cultivation.
Tracking regulations at the local level is a critical key to analyzing potential business and Common Actions investment Several local governments have enacted temporary moratoriums. They are doing this because opportunities. they need time to figure out what they want to
do and this is a way to prohibit people from starting certain business types that cities aren’t yet prepared to regulate. While local governments can allow and regulate commercial marijuana activities, they can also ban commercial activity outright and many have already done so. They can permit delivery-only; several jurisdictions don’t want commercial marijuana businesses in their area, but they understand that patients need access. Cities in California will start to see more ballot initiatives this spring. A tax ordinance adopted by Bellflower on Dec. 12, 2016, will go to voters on March 7, 2017. Voters in Los Angeles will also vote on March 7 regarding a gross receipts tax on medical and recreational marijuana businesses.
SPOTLIGHT LOCATIONS The places that are allowing and regulating marijuana businesses have several decisions to March 2017 |
make. They are addressing issues such as the types of facilities to allow and whether to allow an unlimited number of each facility type or to establish caps. Cities are also addressing issues of zoning and land use, conditional use permits, distance requirements, limiting specific facility types to specific zone districts, fees, odor control, security, operations plans, application and licensing procedures, inspections and enforcement, as well as transportation and food handling.
Lynwood Lynwood, a city in Los Angeles County, adopted an ordinance on Dec. 20, 2016, to allow indoor medical marijuana cultivation in a few specific commercial areas and to allow medical manufacturing in Districts zoned M. Dispensaries are still banned in the city. Lynwood also has a cap of no more than five licensed premises of any license classification type as defined in MCRSA. In addition to the common topics addressed by cities, Lynwood has created development agreements that outline a plan for public outreach, education and community service. Lynwood also has an interesting caveat to its marijuana business ordinance that prohibits changes in ownership or location. According to the ordinance, “Any owner of a medical cannabis business who obtains a permit under this chapter may not sell, transfer, pledge, assign, grant an option, or otherwise dispose of his or her ownership interest … .” In regards to location, the ordinance stipulates, “The Location shall only be the geographical area that is specified and accurately described in executed documents verifying lawful possession.” As an exception to the specified location, a marijuana business can relocate to other areas or units within the approved building structure if a change of location application is approved by the city; however, that business is still limited to the same geographical location. The Lynwood City Council could make further action to change the ownership or location provisions of its ordinance, but the ordinance as it stands makes a case for conducting acute due diligence of business partners and owning the building that houses your business so you’re not held hostage by a landlord.
Maywood Maywood is particularly interesting because of its limited size — it is 1.2 square miles — but the city did pass an ordinance to regulate marijuana businesses, perhaps indicating that a municipality’s size doesn’t necessarily matter as much as the opportunities it may present. According to the 2010 United States Census, Maywood has a population of nearly 30,000 residents, making it California’s most densely populated city. Maywood also has the highest proportion of Latinos in Los Angeles County. Maywood City Council adopted Ordinance 16-03 on Dec. 28, 2016, allowing cultivation, distribution, manufacturing/processing and dispensaries, with the definition of a dispensary encompassing delivery. Maywood still has several details to work out.
Hollister On Dec. 19, 2016, the city of Hollister, in San Benito County, adopted Ordinance 1131, a robust ordinance to regulate marijuana businesses. While many other localities may not enact such in-depth measures, state law is likely to require a majority of what is required in Hollister’s ordinance; this should be seen as preparation for what lies ahead instead of a deterrent. Ordinance 1131 allows for medical cultivation, dispensing, manufacturing, distribution, transportation and testing. While the ordinance doesn’t permit outdoor cultivation, it does allow indoor and greenhouse cultivation if businesses meet certain requirements. Hollister is limited to two dispensaries, but dispensaries are allowed to deliver. Beyond dispensaries, the ordinance doesn’t place a cap on license types, but city council does have the authority to institute caps on the other license types via resolution. In regards to residency requirements, at least 75% of the owners and managers must have been residents of California for a minimum of three years prior to the date of application. Businesses must attest that they will give preference to residents of Hollister when hiring employees. Delivery originating outside of Hollister and terminating in the city is allowed if the person delivering is permitted by the jurisdiction from which the delivery originated and the person has obtained a business license from the city of Hollister.
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What You Can Do Now There are several actions you can take now to affect policy. First and foremost, attend city and county council meetings related to marijuana laws and regulations. Being present shows councilmembers that you’re invested in the rulemaking process. Before each council meeting, meet with your associates so you can organize the delivery of your message during the public comment period. You want to avoid incongruity and repetition. Elect one representative to present a persuasive message that succinctly covers your key points. Keep personal feelings out of public comments. You can use personal anecdotes so long as they serve as evidence to back up your points. Don’t clap when you agree with a comment and don’t make an outburst when you disagree. Respect all in attendance. Listen to the actual concerns of the council. Look for mutually beneficial outcomes, e.g., if you keep hearing councilmembers or commenters complain about
Attend city and county council meetings related to marijuana laws and regulations.
the odor of marijuana, create and communicate a plan to solve that issue. Request and form ad hoc committees that represent all perspectives. Educate the council and the opposition, hiring lobbyists if necessary. Bring statistics on local support of AUMA. Form or join existing local alliances and/or trade groups. If there are multiple organizations in the same area, find common ground and pool resources. Approach cities that might not otherwise appear to be open for business with a plan that outlines how you are going to help the city, including your plans to mitigate any perceived concerns, expenses or dangers to health and safety. Provide the council with detailed operating procedures and potential fiscal impacts for job creation, tax revenue and plans for local reinvestment in the community. If you have a local license, prepare for state oversight. If you don’t have a local license, speculate property, but know that nothing is without risk.
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Driving the Future of Cannabis
When is a Licensed Distributor Legally Required in California? BY J a m e s M u r p h y
alifornia’s recently enacted regulatory framework
for cannabis incorporates many of the alcohol industry’s reliance upon distributors. The role of a legal cannabis distributor in California is to ensure proper testing and handling of products throughout the business-to-business supply chain, with additional opportunities to provide inventory, co-packing and other services that can provide immediate efficiencies or value add to the legally defined and regulated cannabis industry. The historic nonprofit structure loosely governed by the California Attorney General Guidelines will give way on Jan. 1, 2018, to legalized medical cannabis under the Medical Cannabis Regulation and Safety Act (MCRSA) and to recreational cannabis under the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), triggering dynamic change for California’s legal cannabis environment.
As an understanding of the past and present is often the key to creating a better future, it is vital for potential market entrants to grasp California’s present structure in order to understand how it will transform with the future of regulated distribution under MCRSA and AUMA. Prior to Jan. 1, 2018 The Attorney General of California has provided guidelines for the security and non-diversion of medicinal cannabis requiring that distributors: (1) operate on a nonprofit basis as a collective, cooperative, or mutual benefit nonprofit corporation; (2) acquire medical cannabis only from constituent members and distributed only to qualified patients or their primary caregiver members of the cooperative or collective; and (3) do not distribute medical cannabis outside of California.
These guidelines provide ambiguous guidance to cannabis operators. However, thankfully MCRSA and AUMA will now provide increasing certainty to what has been a very difficult environment to define. Until applications are approved or denied for distribution licenses under MCRSA and AUMA, distributors are subject to local laws and state laws applicable to similar businesses, such as maintenance of any required licenses, seller’s permits and payment of required taxes, including sales taxes. After Jan. 1, 2018 Distributors may be licensed under both MCRSA and AUMA. MCRSA and AUMA have nearly identical license categories except AUMA refers to dispensaries as “retailers,” eliminates the transporter license and adds a micro-business license. In order to apply for a distribution license under either law, the applying party must first have one or more local licenses, issued by a municipality or county. So the bottom line: present law remains in effect until a party is accepted or denied a distribution license. Licensing deadlines will be defined in MCRSA and AUMA regulations, which are predicted to be ready during the second quarter of 2017. Defining MCRSA MCRSA has complex restrictions on cross-licensure intended to break-up the vertical integration of medical cannabis businesses by limiting a licensee’s ability to hold multiple types of licenses. Subject to limited exceptions, MCRSA permits licensees to hold up to two different license types. Subject to limited exceptions, MCRSA licensees are prohibited from holding an ownership interest in real property, personal property, or other assets associated with or used in any other MCSRA license category.
The role of a legal cannabis distributor in California is to ensure proper testing and handling of products throughout the business-to-business supply chain...
Specifically, MCRSA distributors (Type 11) must be licensed transporters (Type 12) and are prohibited from holding any other type of license. However, distributors may hold any number of distribution and transportation licenses throughout the state. In summary, those with a grow, manufacturing, dispensary or laboratory license are not allowed to hold a distribution license. Defining AUMA AUMA does not impose the same restrictions on licensing as MCRSA. Under AUMA, distributors (Type 11) may not hold a testing license under MCRSA or AUMA, nor hold a large cultivation license (Type 5, 5A or 5B) under AUMA. We anticipate that many of the license-holding restrictions contained in MCRSA will be incorporated into AUMA through future regulations.
DISTRIBUTION REGULATIONS AND RESTRICTIONS Department of Consumer Affairs MCRSA and AUMA distribution and transporter licenses and regulations will be established through the Bureau of Marijuana Control and governed by the Department of Consumer Affairs. Distribution Under MCRSA and AUMA, all cannabis and cannabis products are required to go through a licensed distributor for purposes of testing and quality assurance prior to market. Distributors are required to verify identity and quantity of products and ensure a random sample is tested by a licensed testing facility. Upon receipt of a certificate of analysis from the testing facility,
distributors must conduct a quality assurance review on all products pursuant to standards to be determined by the Bureau. The Bureau is also considering regulations governing distributor repurposing of products that do not meet minimum testing requirements. Prior to delivery or sale at a dispensary or retailer, all products are to be labeled and placed in a resealable, child-resistant package. Distributors shall ensure that all products satisfy labeling and packaging requirements and restrictions prescribed by the Bureau and the Department of Health. Distributors may purchase wholesale products from cultivators and manufacturers for resale to dispensaries and retailers. However, cultivators and manufacturers may maintain contracts with dispensaries and retailers and enter into service agreements with distributors to store, test, and deliver products to dispensaries and retailers. This summarizes the entire regulatory environment regulating the cannabis supply chain and required licensed distribution. Distributors shall comply with all seed-to-sale tracking, security and storage protocols to be established by the Bureau. March 2017 |
Transportation and Delivery Under MCRSA, distributors must also hold a Type 12 transporter license permitting distributors to transport medical products between MCRSAlicensed facilities. Transporters have to submit a transmittal of record to the Bureau to verify receipt of products to be transported. Transporters also have to complete an electronic shipping manifest to transmit to the Bureau and recipient licensee prior to transport and maintain a copy of such manifest at all times during transportation. MCRSA does not authorize the transport of products outside California, unless authorized by federal law. Transporters must comply with all protocols for seed-to-sale tracking, security, and storage of medical cannabis, which will be established by the Bureau. Unlike MCRSA, AUMA does not have a separate license category for
transportation between licensees. The Bureau will establish standards for types of vehicles and qualifications for drivers eligible to transport commercial products. Local government may not prevent delivery of commercial products on public roads if the licensee is operating in compliance with AUMA and applicable local laws. Like MCRSA, AUMA does not require a special license for retail deliveries to customers. Under MCRSA and AUMA, local governments may ban deliveries of medical cannabis to residents in their jurisdiction. Distribution and transporter licenses must be bonded and insured in a minimum amount to be established by the Bureau. Distributors may collect a fee for all distribution and transportation services rendered. Sanctions for Noncompliance There are two scenarios where licensed supply chain participants
place their licenses at risk: (a) unlicensed transportation or distribution of cannabis products; and (b) failure to disclose control of prohibited licenses, i.e., licenses other than transportation, while simultaneously holding a distribution license. While it is presently unclear as to what degree regulatory authorities will enforce such restrictions, being identified as a regulatory violator will be problematic as our industry continues to develop. James Murphy is an attorney with the law firm of Horwitz+Armstrong, PLC, a leading cannabis industry law firm. Murphyâ€™s entire focus is on the regulatory environment encompassing legal cannabis operations. His practice includes representation of entities throughout the legal cannabis supply chain, with a focused effort on positioning municipal license candidates for eventual state license success. He may be contacted at jmurphy@ horwitzarmstrong.com.
Time to Scale:
How to Raise Money for Your Marijuana Business BY C h r i s t o p h e r Fa i l l e
new entrepreneurial idea for the marijuana market may involve “touching the plant,” or it may not. It may involve the algorithmic tracking and mapping of relevant zoning restrictions, designs for promising greenhouse lighting systems or a new specialized vaporizer. Whatever the idea, we will suppose in what follows that you are past the proof-of-concept stage, you have a solid team around you and that you need money from outside that group to scale up your operations. Here are some points to keep in mind.
Prepare a careful and convincing business plan At the least, the preparation of a plan will let you know where the question marks still are, so you can address them. Its role in a presentation then follows: if you have resolved the blanks and question marks to your own satisfaction, you will be in a better position to do so to theirs. Remember that this shouldn’t just be something for show. You shouldn’t be preparing a “plan” that you can shelve and forget once the meetings with lenders/investors are done. This should be an actual plan, something you have taken to heart.
Have a good attorney on hand Getting serious with investment capital is not like hitting up your in-laws for the cash you need to make it through a tough month. It is a legally fraught
enterprise, and you need someone on your side who knows the traps in the grass and who will keep your ankles away from them. This is not your staying-out-oftrouble-with-the-police lawyer. You will need one of those, too, in this business. Under Rohrabacher-Farr, staying scrupulously within the state law and regulations also limits the odds you will become a target of the federal authorities. Distinct from all of that, as your business looks for outside financing you will want someone who knows his way around the law of finance: private placements, single purpose private equity funds, etc. If you wake him up at 3 a.m., you will want him to be able to give you a coherent explanation of the difference between Reg A and Reg A+.
Decide whose money you want Yes, cast your net widely at first. You may want to start by brainstorming with the other members of the founding group. What trade associations do you belong to? Do you have friends who belong to others? What local business groups? Then apply an adage that dates from days when the telephone was king, and the king still had a rotary dial. Call high. Deal whenever possible with people who actually make decisions, not with their staff. It is no crime to call cold, but it ought to be a crime to call low. This is the 21st century and you will of course consider on-line sources. One of ArcView Group’s ventures is The ArcView Investor Network, which
is precisely devoted to this matter of getting entrepreneurs and investors into mutually satisfactory relations. You aren’t forming a relationship with your investor’s money, but with your investors. Remember that investors are themselves industry contacts, nodes in the network you are building, perhaps sources of valuable counsel. You might want to be as particular about your investors as they will be about you. Within that realm, research investors thoroughly before pitching to them.
Did Anyone Mention “Crowdfunding”? There may seem to be an old-fashioned feel to the above points, as if I were intent on singing “the fundamental things apply as time goes by.” Well, they do. Be prepared to travel, to meet investors in person, and meet them again, building trust. That said, it is time to acknowledge the 21st century reality, crowdfunding. This comes in a lot of forms and under different legal cloaks. At the federal level, the JOBS Act was designed largely to “jumpstart” equity financing from and to the “little guy,” businesses and investors who may both be well below Wall Street’s radar. But, frankly, the JOBS Act hasn’t proven adequate to that task. Intrastate offerings, under the guidance of state regulations, are more viable. A final point under this heading: Be sure to consider both equity and debt crowdfunding. Each has its own attractions and limits. As Scott Jordan, of Dynamic Alternative Finance, has put it, “When you take on debt, it’s like dating. When you take on equity, it’s a marriage.”
Australians Ready to Invest in U.S. Marijuana
edfield Asset Management, an Australia-based concern that until now has focused on offshore technology and biotech investments, is moving into the legal marijuana market. RAM has three partners: Gaelan Bloomfield, Ram Venkat and a third silent partner who prefers his name not be used. Marijuana is something of a departure for RAM, which has a broad technology focus looking to efficiency/productivity innovations and security technologies. One of its portfolio companies is Votiro, a Tel Aviv-based security concern. Although Australia has a fascinating recent legal and political history on the subject of marijuana, and although the ASX has cannabis companies among its listings, Bloomfield and Venkat are notably unenthusiastic about investing there. The problem is not that Australia’s own domestic market is limited to medicinal use, though it is, but that the proposed regulations deliberately create a high cost environment, one where operators will struggle with licensing, construction and compliance costs. So … RAM, which is less than two years old, looks abroad. It has in effect said to the money it manages, “California is the place you ought to be,” so it has loaded up its figurative trucks to send the money to … one’s respect for intellectual property rights prohibits one from completing that rhyme. RAM, rather, as represented by these two managing directors, plans chiefly to pool the money of Australian individuals and institutions in order to invest it in the marijuana industry in California.
BY C h r i s t o p h e r Fa i l l e
In recent interviews conducted prior to the November vote on California’s Prop 64, Bloomfield and Venkat expressed optimism about the outcome. That optimism, of course, turns out to have been warranted: the proposition passed with more than 57% of the voters saying “yes.”
Assembly Bill 2679 “We’re deploying capital rapidly into the cannabis market,” Bloomfield said in an interview. On Sept. 29, 2016, Bloomfield observed, California Gov. Jerry Brown signed Assembly Bill 2679, a new law designed to protect those who extract medicinally valuable components of the marijuana plant. These extractors had until then worked under the shadow of the so-called “meth house statute,” Health and Safety Code §11379.6 which could impose a sentence of up to seven years and a fine of $50,000 for the manufacturers of a controlled substance — another two to five years if a child resides in the same “structure” where the manufacturing is done. That 1984 meth-house law, a relic of the “Just Say No” era of television ads with frying pans and omelets, now incorporates a specific exemption for the manufacture of medical cannabis products “either
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directly or indirectly by chemical extraction or independently by means of chemical synthesis … .” So, if one is going to bet on California’s market, how does one go about it? Such indexing as exists in the industry is still in its infancy. One bets, rather, on specific entrepreneurs who cultivate or market the stuff. In the United States more broadly, an estimate by New Frontier, a cannabis-focused data analysis firm, has the total sale of statelegal marijuana, both medical and recreational, reaching $7.1 billion in 2016, which would be a growth of 26% over the 2015 figure. Illinois, Nevada, New York and Minnesota are just now coming fully “on line” so to speak, and even the mature markets such as Connecticut are showing that there is room for further growth.
HNW Individuals and Institutions The money coming to America through RAM won’t of course be the only capital taking advantage of these trends. Robert McVay, a partner at Harris Moure, a boutique transactions-oriented law firm headquartered in Seattle, Wash., blogged recently that he has been hearing of investors interested in the U.S. cannabis markets from “Canada, Spain, Israel, The Netherlands and Germany,” with some lesser level of interest too from “Croatia, Chile, and China.” McVay also pointed out some of the obstacles. Washington state itself, for example, doesn’t allow anyone who is not a resident of that state, much less someone from outside the U.S., to have any profit interest in a marijuana business there.
So: which Australians are interested in investing in marijuana opportunities in such states in the U.S. as will welcome their money? “If you had asked me that question 12 months ago, I would have said it was 99% high net worth individuals,” Bloomfield said. But in the last “three to six months” — that is, in the spring and summer of 2016 — “some institutions have begun to come on board.” Perhaps, then, the moves toward liberalization of marijuana at home, however limited in themselves, may have had an unintended behavioral impact, legitimating the whole idea of investment in the field, opening it up to the decision makers for institutional investors. Bloomfield is a veteran of the Strategic Advisory Practice of KPMG Sydney. Venkat has structured derivativebased funding solutions for institutional clients of Citigroup Global Markets.
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Marijuana Industry Taking Ride on the Laffer Curve n the late 1970s, and through the first presidential term of Ronald Reagan, there was a good deal of talk in the world of public finance about the “Laffer curve.” This curve, once drawn on a napkin by economist Arthur Laffer for the benefit of journalist Jude Wanniski, illustrates the relationship between the stream or revenue the government receives from the taxation of any productive activity, on the one hand, and the rate of that tax, on the other. Put simply, the idea is this: if any private sector activity is taxed at 100% of the private entity’s revenue, then no one will have any incentive to engage in it (on the books, anyway) and the government’s revenue from that taxation will be $0.00. Likewise, if the activity is taxed at 0%, then of course again the government take will be $0.00. There must be some point in between 0% and 100% taxation that represents the optimal level for purposes of the public fisc. When an activity is taxed at its optimal level, then both increasing the level of taxation and decreasing the
level of taxation will have the By Christopher Faille same effect: either action will reduce revenue. Likewise, when an activity is taxed at above the optimal rate, then (this was the political magic of the curve) decreasing the rate at which it is taxed will increase the treasury’s revenue from the taxation, both by bringing the activity out of the black markets, and by encouraging new entry into that market, investment and entrepreneurship that the too-high tax had previously scared away. Reagan took office committed to the idea that taxes on income-producing activity in the United States generally were prohibitive, so that cutting them would have a variety of positive consequences, including both stimulus for the private sector and new money for the public sector. Some Political Irony Those, the late ‘70s and early ‘80s, were also dark days in the politics of marijuana, characterized by paraquat spraying and the militarization of anti-drug efforts. Further, the politi-
cians most ardent about the horrors of marijuana use were often enthusiasts of the Laffer curve. There is irony, then, in the way in which the ideas behind the Laffer curve so perfectly fit the current political realities of marijuana. This is especially so in the state of California, where the prospect of marijuanarelated tax revenues, on both the state and the municipal level, has long been a big part of the attraction of the liberalization of marijuana laws. Under Proposition 64, which prevailed on Nov. 8, 2016, with 57% of the vote, individuals 21 and older may possess, cultivate and sell marijuana. But the activity will be heavily taxed: $9.25 per ounce of flower, $2.75 per ounce of leaf and 15% as an excise tax. This increases an existing level of taxation of the industry, which on the medicinal side of the market has been lawful in California since 1996. According a recent report from the state legislative analyst’s office, the amount of state and local revenue collected throughout the state from such taxes was “in the high tens of millions of dollars annually” before the Prop 64 vote. Existing state and local taxes are to be carried over to the adult recreational product, and the taxes specific to the Prop 64 language will be additions to those. Have the authorities reached beyond the optimal level of taxation here? Are they burdening the legal market to an extent that amounts to keeping a large portion of marijuana growth and sale on a black market basis, thus removing it from the realm of tax revenue? And if so, might that not hamper many of the advantages sought from legalization, beyond the issue of revenue itself? The Case of Petaluma Petaluma is a town at the northern end of the San Francisco Bay, in Sonoma County, with a population of nearly 60,000. It is a “charter city,” founded
in 1858, a fact that gives it greater flexibility vis-à-vis state-level initiatives than some other municipalities may have. After the legalization of medicinal marijuana in 1996, the town’s government took a clear position, which might be paraphrased: “not within our boundaries, you don’t.” Card-carrying marijuana patients had to go outside the town for their supplies. To be fair, they didn’t have to go exorbitantly far. There has long been a dispensary in Sebastopol, about a 20-mile drive to the northwest. Attitudes have been changing within Petaluma, and, though slowly, within the town council, too. About a year ago Petaluma enacted an ordinance allowing medical marijuana users and caregivers to grow up to three plants outdoors for their own use. An earlier staff recommendation had been that only indoor growth be allowed. The idea of allowing some backdoor-garden cultivation was a late addition. Now, things seem destined to change at an accelerated pace. In a recent interview, the mayor of Petaluma, David Glass, a man who has long been an opponent of any commercial-marijuana activity in town, expressed a change of heart. Petaluma has a “weak mayor” form of government, so he can’t act except by working within the council. But he said that the people of Petaluma voted in favor of Prop 64, as did the people of Sonoma County, and “every jurisdiction to which I might look for guidance.” Given this display of the will of the people, Glass is not inclined to “do anything” to try to keep marijuana commerce out of town. Asked about the possible fiscal significance of a tax, Glass, whose city has a general fund of $41 million, replied, “I don’t think it played any part at all in the mind of the general public.” He believes that what won the vote for liberalization was the general “live and let live” ethos of California.
He referred further questions to another council member, Teresa Barrett, who he said has been on the Council for 10 years, and for a long time was the sole opponent of the town’s marijuana exclusion. Barrett’s Views When contacted, Barrett agreed with Glass. She had not yet heard him express his views about the will of the people and his own change of heart, but she was happy to learn of them. Asked why the rest of the council had taken a hardline exclusionist view of marijuana for years, she answered with a single word, “crime.” There was a consensus, which she saw as a prejudice, that marijuana as an industry would bring crime in its wake. Her own view in favor of liberalization she described as founded on the conviction that addiction is a medical problem, not a criminal one, and should be treated accordingly by the law. On the fiscal issue, the prospect of gaining extra money for the general fund was, she said, one of the factors in her own mind, “but I don’t think that this was in the mind of Average Joe when he voted for this.” She said there weren’t a lot of news stories on, say, the amount of revenue that Colorado and its municipalities generated from legalization there, so this was less part of the debate than it might have been. Another point on the fiscal issue, Barrett is open to the possibility that the revenue take for the state and localities may prove disappointing. She expressed a version of the Laffer-curve argument, though she didn’t call it that, saying that perhaps the tax will itself be seen as a burden, and “people will just start growing [marijuana], adding it to their garden” rather than buying it. One simplifying factor may speed change in this one town. There is no separation of political and zoning authority. “We [the council] set the March 2017 |
zoning rules,” Barrett said, and she hopes the council sets rules for a possible dispensary analogous to the rules that exist at present for the sale of alcohol. But at present “there are no rules about that.” It is just as well that the new law will not be implemented until Jan. 1, 2018, so such issues can be worked out. In general, as to abuse of any substance, “If you take it out of the criminal justice system you can treat it accordingly,” as a medical matter. Many in California are concerned that the new Trump administration will prove hostile to all of these state liberalization experiments. Barrett said, “Jeff Sessions doesn’t fill me with a lot of optimism, but if the Trump people are as business-minded as they say they are, they’ll perceive that this is a business that could take off.” She thinks the “jury is still out” about the new administration’s position. All Over the Map The director of California NORML, Dale Geiringer, agrees with Barrett about that jury. He said in a recent interview with Marijuana Industry News that Trump has himself indicated he wants to leave the matter up to the states. But he doesn’t expect that the new administration will put a priority on an anti-pot crackdown. Geiringer also believes that it is possible Congress will yet address the “banking thing,” that is, the issue of granting state-legal marijuana entities access to the federally regulated banking system. Advocates might sell such a change to a Republican House and Senate “as a deregulatory measure on the one hand and as a law enforcement issue on the other.” Law enforcement because, as often observed, effectively forcing businesses to keep large sums of cash on hand amounts to a poorly stored and maintained powder keg. On the fiscal side of the matter, Geiringer’s observations do remind one of Arthur Laffer. It mightn’t be wise, he said, for municipalities to
expect a big revenue boost. “The state is going to be taxing at a hefty rate, close to 25%. Anything in excess of that is going to be very burdensome.” Indeed, this is behind his prediction of a continued black market. “Burdens are high enough to make it very likely that an illegal market is going to be around for an indefinite future.” Asked about Mayor David Glass’ reaction to the will of the people as expressed in Prop 64, Geiringer said, “we’ve heard that in a few cases also,” that is, California NORML knows of other instances in which municipal officials have changed views as a consequence of this vote. But the reaction is far from universal, and there will be fights at the local level ahead. Some municipalities are “moving right away not to allow it,” such as Fresno County. Back to Legislative Analysis But to conclude this discussion one might look back to the legislative analysis of the budget consequences of Prop 64 mentioned above. The report has been cited often for the number $1 billion. It does say that total state and local revenues “could eventually range” as high as $1 billion annually. But both the “could” and the “eventually” in that sentence constitutes an important qualification. Further, even if the $1 billion is taken as gospel, its significance shouldn’t be oversold. The 2016-17 state budget calls for the total expenditure of more than $122 billion. That of course does not take into account all of the municipal budgets. California’s Treasury plans to spend $1.5 billion just to “improve or replace deteriorated state office space in central Sacramento, including the State Capitol Annex.” Further, the report acknowledges a negative effect of legalization seldom highlighted by either its advocates
or its opponents: the existence of a black market has its good side for the communities where it thrives. “Precisely how this measure would affect these local economies [in Humboldt, Mendocino, and Trinity Counties] is unknown. Lower marijuana prices and more opportunity for legal cultivation elsewhere could hurt the economy in these areas, reducing local government tax revenues. If, however, local growers and businesses successfully marketed their marijuana products as premium goods, consumers might be willing to pay above-average prices for them. If that occurred, it could help offset some of the negative economic effects in those areas.” The bottom line is that, yes, the victory of Prop 64 is an advance for freedom and, yes, it is sensible to treat addiction as a medical issue, which requires that authorities at every level stop treating it as a crime but it is dangerous to oversell this change, and to imagine that it is a goose that will forever lay golden eggs for states and towns alike.
More than Just a Good Idea:
Movers and Shakers in
Cannabis Technology Those innovators entering the market today may find themselves held to a tough standard when it comes to procuring and sustaining a strong investment in the industry. Investors and new companies alike must be willing to recognize and ensure investments are made in technologies that will prove useful in day-to-day business situations over the longterm. This can sometimes be tough to gauge. BY JEN KNOX Recognizing the cutting-edge trends in the wider tech industry is the first step. Mobile access to business transactions, transaction security, increased accessibility, data filtering and adaptability are necessary for any business to continue to thrive. Security is of utmost importance as there are an increasing number of breaches in customer data, as are precision and reliability. Beyond crowd-funding possibilities, entrepreneurs looking to secure funding have other options, but only if they truly stand out in what is becoming an increasingly competitive marketplace. Cannabis-focused private equity companies, venture capitalists and angel
Herbalizer investors see good ideas every day, and the onus is on the companyâ€™s people, products, services and approach to a total solution that makes a difference. For many in the cannabis industry, the best source of investment and capital is through strategic partnerships. Strategic partners provide entrepreneurs, and vice versa, a means to enhance their respective core capabilities such as access to markets and customers, quicker research and development, and improved competitive positioning. Forward Thinking Nearly all investors, to some degree, are risk averse, meaning that they expect some degree of certainty when it comes to the return on their investment. What this means for those investing in cannabis technologies is a strong belief in the sustainability and reach of this industry. Entrepreneurs and investors alike need to think about the common key performance metrics that indicate
which cannabis technology solutions will deliver a return on their investment of time, money and effort. From the point of view of entrepreneurs, what kind of returns can they promise new investors and how can they quantify realistic sales and expansion? From the point of view of investors, a good idea coupled with robust technology is only a start. The management team behind the product is crucial. No business is going to succeed without people who believe in the product or service. Best business practices are never negotiable, and as the cannabis industry begins to change and mature in certain markets, innovation with practical application is necessary. New cannabis technologies are appearing at an accelerated rate and they have produced a wealth of growth opportunities for those able to take advantage of them. To succeed in todayâ€™s cannabis business environment, entrepreneurs and investors must be creative in their approach. Technology is never
stagnant and there is an inherent risk that increases with inflexible solutions, even if they offer a short-term gain. Successful entrepreneurs and investors alike realize that the idea is the catalyst, and adaptability is a must. With additional legislative and perceptional hurdles surrounding cannabis markets, there is no room for division or trends that will fizzle out with time. The cannabis market in North America is unlike any other consumeror medical-driven market. Although its growth is robust, efforts are often stalled due to outdated legislative barriers to research, access and sales, and persistent geographical restraints. Successful cannabis technology companies today are challenged to not only navigate such difficulties, but also to set a standard of best practices that will break down barriers for the next iteration of cannabis entrepreneurs. Meanwhile, entrepreneurs must ask themselves how businesses and consumers alike can realistically use their solutions today and over the long-term as the industry expands. As market demand increases, technologies can provide phenomenal potential across market verticals by offering new-wave health and wellness treatments, manufacturing solutions, product enhancements, and optimized delivery solutions to patients and consumers. Due to the adaptability and reach of various technologies, innovations in this field will directly influence the efficiency and effectiveness of the entire ecosystem. Such advances, in turn, will ultimately increase industry investment potential, thereby feeding the financial health of this expanding marketplace. March 2017 |
“Recognizing the cuttingedge trends in the wider tech industry is the first step.” Customized Solutions for Cannabis Reworking technologies that already exist in the food and beverage, automotive, manufacturing and healthcare industries was initially enough to get a technology idea off the ground in the cannabis market, but it is quickly becoming apparent that technologies must address a clear and definable challenge to growers, manufacturers, retailers and/or consumers. Customized, refined solutions must be presented in such a way that will grab potential investors’ interest, and this is about more than the solution itself. A sustainable technology must offer holistic gains beyond individual business to also augment the efficiency of the entire industry. Technology-based movers and shakers in the cannabis industry
include Herbalizer, Confident Cannabis and Canopy. Although these companies have disparate offerings, they share many of the same attributes. What sets such companies apart begins with a good idea and clear mission, but relies on execution, adaptability, high standards, expertise from other areas of science and technology and strategic partnerships.
Herbalizer: Product Distinction When it comes to offering a unique value proposition in terms of design and service, Herbalizer stands out as a North American cannabis company that is setting a global standard. This vaporizer company’s technology was founded and refined with the guidance of former NASA engineers. Currently headquartered in San
Diego, Herbalizer was co-founded by Josh Young and Bob Pratt, who have a combined three decades of aerospace experience. Leveraging such expertise, Herbalizer launched a desktop vaporizer that gained industry attention for its internal computing system. The intricacies of the product are impressive. With a temperature sensor that heats with immediacy and regulates instantly by leveraging halogen energy, the product delivers a consistent user experience. The product is often lauded for its ability to heat herbs and oils instantly. Users are able to regulate the temperature, as higher heat settings directly increase the rate at which cannabinoids and terpenes are released, allowing for a customized user experience ranging from mellow to intense. Users further customize the experience by inhaling the vapor via a squeeze valve balloon or a medical-grade silicone whip. The intricacies of the Herbalizer’s desktop vaporizer are impressive. Such an exemplary design sets new standards in the ever-changing and ever-expanding industry by raising the bar on experiential value. Introduced in 2013, Herbalizer has since seen tremendous demand from distributors in the United States and Canada, but getting started meant it had to find funding. To get its product built and launched, Herbalizer raised $1.25 million from private investors. It was clear
that to deliver such a precise product, the company’s material needs were steep, so it also focused on building connections in the industry. “The challenges were in finding the right build and parts to use. We’ve sourced a lot of companies and found custom parts that allow us to build what we consider the world’s best desktop vaporizer,” said Brandon Ward, Community Manager at Herbalizer. Herbalizer’s tag line is “relief by design,” and herein is one of the secrets to its success. Reviews of the company’s desktop vaporizer are consistently positive, despite the product’s relatively high price point compared to other, similar products. Bolstered by its two-year warranty and focus on customer education, its ongoing service and commitment to quality appeals to today’s discerning cannabis consumers. When asked about industry challenges, Ward admitted that Herbalizer is not immune. “We have many setbacks as a company in the cannabis industry, as there are many roadblocks due to the nature of our industry. Were it not for the outstanding product that we make, we would have been dead long ago. The experience of the Herbalizer stands above all other vaporizers, and for that we have developed a small tribe of passionate and committed users,” said Ward. The company’s signature product is marketed as a vaporizer with functionalities for herbs not often specified, and the brand has become strong due to the company’s customerfirst focus. Herbalizer learned early to let the sophisticated technology speak for itself, so the company focused on consumer stories, reviews and word of mouth to heighten awareness of its product advantage. As Herbalizer currently seeks to expand, focusing on the launch of new products, it credits it customer relationships for its success above all else. In Ward’s words, “We listen to the feedback we get from our community and we take action to respond. This is our greatest asset, the people we serve.
By listening to our committed users, we are able to mine gold and direct our company to the path towards success.” Confident Cannabis: Meeting the Market’s Changing Needs It is not only products that are taking cannabis to new heights, however. With a focus on the total industry enhancement, Confident Cannabis is a primary example of a company quick to gain investor attention after identifying challenges for today’s cannabis entrepreneur. The company, based in Palo Alto, Calif., markets solutions through its software-as-a-service (SaaS) platform that assists consumers, labs, producers, retailers and regulators across a growing number of U.S. states. Confident Cannabis created a unique value proposition by focusing on how companies can mine big data. Founded on the notions that the industry needs accountability and that modern-day cannabis consumers demand transparency, Confident Cannabis established the largest database of available cannabis plants with data that identifies the potency of the plant and ensures quality by testing for pesticides, microbials and solvents. This data is live and continuously updated. Specifically designed for testing cannabis and researching strains, the company’s solution also benefits labs. Real-time information reduces the margin for error and ensures faster test results. Producers and retailers are able to add data, find connections and gain access to emerging trends in the market, while also establishing credibility that can be beneficial for both sales and regulatory compliance. The value of such transparency extends to regulators by quickly answering questions about the safety and quality of cannabis plants currently on the market. Confident Cannabis got its start with a $3 million investment from
Slow Ventures, a venture capital firm based in San Francisco, and remains a primary example of how a company can distinguish itself by identifying real and current market needs that bridge customer to company, offering solutions along the value chain. The platform’s value was found by answering an unmet need in a marketplace, and this is a thing that entrepreneurs may find harder to pinpoint as the market matures. The secret to procuring such investments, according to Confident Cannabis, is a unique value proposition, which can be found only by considering how a solution is benefiting business owners both today and a few years down the line. When asked about the value of a total-market offering, Steve Albarran, Co-founder and CEO of Confident Cannabis, explained, “The industry today is highly fragmented and opaque. It is very hard for businesses to know what’s being made, who makes it or what it’s made of.” The demand for reliable and continuously updated information was clear, and no other company was able to offer such reliable information. “We built Confident Cannabis to help bring transparency to the industry by helping businesses know what’s being made, who makes it and what it’s made of. Nationwide. In real time.” By creating an open market in which growers and consumers can find each other, needs are optimally matched. This model of business is not new to other industries, such as automotive and real estate, but it feels timely and necessary during the cannabis boom. CanopyBoulder: Building Bridges Patrick Rea, CEO and Co-founder of CanopyBoulder, recognized potential for technology companies and investors alike when launching the Canopy March 2017 |
business accelerator program. proposition, he said, “It’s all about the Boulder, Colo., is home to pivotal people and their credibility.” companies in the larger technology Around 70% of the companies in industry, including Techstars, a CanopyBoulder’s accelerator program technology-based business accelerareceived additional funding after tor. Techstars has invested in more completing the accelerator program. than 600 new tech companies since BDS Analytics, a provider of cannabis inception, and its success was proof of business intelligence and market share concept — it was an innovative way for tracking, is one of Canopy’s many new companies and investors to find success stories. each other. Founded by Roy Bingham and Liz To meet similar investor and Stahura, with combined experience business needs in the cannabis in marketing, business intelligence industry, CanopyBoulder was founded and retail, BDS Analytics was able to in 2014. Patrick Rea and Mark Nottoli leverage its existing expertise, and this launched the Canopy brand, which not only attracted investor confidence, made its first investment in spring it became invaluable as their business 2015. This cannabis investment fund grew, leading a $1.5 million investment and business accelerator focuses on the in September 2015. mutually beneficial needs of investors When asked about pitfalls, Rae, and entrepreneurs. whose background is in investment CanopyBoulder offers seed-stage banking, mentioned that losing focus business investments by providing or being distracted from the primary up to $80,000 in capital, along with solution is one of the major drawbacks mentorship in return for equity. for new entrepreneurs. The mentorship aspect of the model There is plenty of opportunity for shows the company’s dedication to its technology startups and investors in partners, enabling tech innovators to the cannabis industry. There are more create a go-to-market strategy that is solutions needed, and less corporate customized and will provide results. activity, so small businesses are poised From inception through December to capitalize on ancillary solutions. For 2016, CanopyBoulder has invested in this reason, Rea stated, “the model more than 47 businesses. of accelerator as an investment fund Bolstered by a strategic partnermakes a lot of sense. Now is the time ship with The Arcview Group, Canopy to invest and diversify portfolios to invests in ideas and people who are mitigate risk. The model is working.” committed to the market. With a focus on ancillary products and services, Canopy seeks to work with entrepreneurs in technology, software, data, security and the media Canopy San Diego: Eric to create an industry-wide Gomez and Jack Scatizzi technological evolution. Canopy invests more than money in companies, and its success has led to multi-locational growth. When asked what advice he has for new entrepreneurs seeking investments, Rea said that investors and entrepreneurs alike would be wise to focus on and provide proof of concept. “One company, BDS Analytics, is an example of an initial investment at the beginning stages.” But when it comes right down to a strong investment
Canopy San Diego: An Idea to be Replicated Canopy San Diego, a part of the Canopy family, is similarly modeled as “the premier canna-business accelerator in Southern California.” In a regionally diverse marketplace, this outgrowth is not only natural but necessary. Canopy San Diego is about industry-inclusive investment and education in the region. This business model epitomizes a collective mindset that takes into consideration totalindustry growth, and it sets a standard for other states in the market pipeline. Managing Director of Canopy San Diego, Jack Scatizzi, told Marijuana Industry News that when it comes to entrepreneurial success, vetting products is crucial. “I think it’s very important to spend the time and energy to test/gauge the product market fit as early as possible. Proving product/ market fit early will go a long way when it comes to gaining traction with the investors that can provide the funding necessary to continue the development of the full product.” When asked about how to do this, Scatizzi said, “The best way to accomplish this is by surveying your potential customers to identify which are the key/must have features they need in regards to addressing their problem. Based on the results of the survey you should create a very simple
“With a focus on building cannabis business investment portfolios that are optimized for risk aversion and mitigation, Canopy is investing in ideas but also nurturing human capital to ensure security for those looking for opportunities in cannabis.” beta product, commonly referred to as a minimal viable product, and get that in the hands of potential customers as quickly as possible to get additional validation and feedback. From here on it’s pretty much just rinse and repeat when it comes to testing new features before fully developing the features.” Canopy San Diego, like CanopyBoulder, recruits and invests in a wide range of cannabis technology entrepreneurs and startup companies. It infuses these small firms with capital to enable market commercialization success in exchange for a share of the company, then seeks out entrepreneurs and startup companies from a wide range of cannabis industry segments including consumer technologies, crop cultivation technologies, retailer/point-of-sale solutions, and the health and wellness markets in order to create cohorts of unification across different regions. Similar to Rea, Scatizzi warns new businesses not to focus on fasttracking solutions, and instead focus on refining them. “Unfortunately, many entrepreneurs try to skip this step and build a fully functional product rich with features and when they launch the product falls flat because it does not actually address the customer’s problem, or it is too complicated to use.” Companies must apply to Canopy San Diego, and investments are only made in ancillary products and services. The company lays out comprehensive terms on its website and is transparent about its investment methodology. For instance, Canopy San Diego’s terms state that it will invest $20,000 in seed funding, plus mentorship and business education for 6-9.5% of the company. Companies are then incentivized to apply for an additional $50,000. Like CanopyBoulder, the program runs for 16 weeks, and companies are selected based on their
growth potential. With a focus on building cannabis business investment portfolios that are optimized for risk aversion and mitigation, Canopy is investing in ideas but also nurturing human capital to ensure
security for those looking for opportunities in cannabis. Thus, the Canopy model enables small businesses and small investors alike in order to meet and incubate the cannabis industry from the ground up.
March 2017 |
Unlocks the Colors of Cannabis
ichelle Reefer, alias MissRadReefer on Instagram, is a cannabis cultivator, connoisseur, strain tester and photographer who uses social media as a way to engage and improve the cannabis cultivation community in her own way. An extremely engaging conversationalist, she uses social media and her photography as a way to interact with and develop her connections in the cannabis community, a currency worth more than an impressive number of followers. Based in the California desert, Michelle has only been growing for about four years. However, she has done a lot in that time, reading everything she can and actively working to improve her craft. In doing so, she has managed to build a strong network of connections in the industry — the aspect to her business that she feels makes her most valuable to her investors. It is undoubtedly her understanding of the plants that has gained her the trust of many breeders. While she is extremely selective about what she ends up growing and posting, she enjoys the symbiotic relationship she has with breeders. “I’m a genetic strains tester. Generally, breeders and I work with various genotypes that they haven’t released to the public and it gives them a chance to get their gear out through my Instagram because I’m trying to find the best of the best. It’s a kind of cross-promotion. It’s all community-based.” “It’s a plant thing. I have a thing for plants and understanding the plant,” noting that she has been working with plants since she was a kid. When talking about her Instagram account, she is surprisingly humble,
BY J o s h B r o w n i n g P H O T O S BY M I C H E L L E R E E F E R
explaining that it didn’t really register when she surpassed 100,000 followers. “I hear people are charging for Instagram posts! It’s crazy ... and I guess you can buy your followers. Everybody totally interacts with me and I think it’s a really big and important thing to interact with them because I’ve definitely been in the position where I can scour the internet for hours and I just need one simple answer. If I can answer, then please, by all means, hit me up … I’m here to help you grow, because I’ve been in that position.” In addition to answering questions, she uses the space to show new products and most importantly, showcase her two passions — photography and growing beautiful plants. At the time of writing this article, she had more than 106,000 followers on Instagram. Specifically, she is known for the hashtag #colorsofcannabis, and there are certainly a rainbow of colors to see when thumbing through her pictures. She draws out these colors by mimicking the fall patterns of nature and encouraging the plant’s natural cycle. “Purples fade to reds and oranges, greens to yellows. The beautiful window doesn’t last long, maybe a day or two.” A plant’s genetics dictate the different shades that it can produce, as well as cooler grow temperatures. “It’s essential to keep grow room temps constant so many of the colors I photograph are genetically colorful and not cold temperature colors because I’m not a fan of cold stressing a plant.” “I felt like not enough people really appreciated what the plant goes [through] and does for its fruits; they focus on the fruit and harvest … too many never even noticed the fade during the flush if they even flushed, so I got to encourage people to flush, which makes a better smoke anyway.” Flushing the plant consists of ceasing to feed the plant nutrients 10 to 14 days before harvest. This forces the plant to use its reserves in the big, lush green leaves. While Instagram is certainly a place for pretty pictures, the experience for Michelle is more about showing her success to her community, developing contacts, encouraging people following in her path and answering every question she can. All Michelle’s production is done at her campus, which she runs with a partner. This campus is set up as an indoor/outdoor mix where everything is a climate-controlled, light-deprivation greenhouse. “I can control my lighting, how hot it is, how much
humidity there is. That’s why my weed looks like it’s been grown indoor, but it’s been grown by the sun.” In addition to her preference for the sun, Michelle prefers her medium to be soil. “I’m getting into amending my soils and making my own earthworm compost, really studying the biology behind living soil. If you have wonderfully alive soil then you have wonderfully healthy plants. Taking care of your root zone is growing 101, more roots more fruits.” The campus is also broken up into different rooms for different types of strains, all organized depending on the condition or symptoms they are meant to treat. “[My partner] and I have a collective, lots of patient-to-patient growing in that aspect. Legitimate March 2017 |
patients are telling me that ‘I’m having problems sleeping’ so we have a room that contains a heavy indica.” To her, it is important to know what her goal is and for whom she is producing. “Most of my meds are primarily for people that I know … I don’t want to just grow random strains.” At any point in time, Michelle says she is growing and testing more than a dozen strains. Michelle’s passion for growing didn’t begin with marijuana, which she didn’t even smoke until she was 24. Her passion for growing started with a simple love of plants and the process of growing. Before branching into marijuana, one of Michelle’s main focuses was the water lily. In addition to being an active forum member, she owned waterlilies.com and used it as a place to share her experiences — similar to her MissRadReefer account. Michelle’s interest in marijuana was piqued when she witnessed the plant’s positive effects on a close friend’s life — a veteran suffering from post-traumatic stress disorder. “I could literally watch [him] be positively affected by specific strains … I watched marijuana — drugs, for that matter — affect him, help him, change him for the better.” “I didn’t grow for me, I would have never, but I did it because of this gentleman,” she said. Her initial
impulse to begin growing was simply a reaction to the high prices that came with medicinal marijuana. She makes it clear that her pursuit of growing was a very intentional, adult decision. “So I started reading for a year … I read all kinds of magazines, I read all kinds of growing books and I read anything and everything that I could, and then I got ahold of five plants.” From those small beginnings, she moved on to running delivery services in Big Bear and Venice, then a dispensary in North Hollywood before deciding that she was not a paper pusher. Between these jobs and the high cost of living in Los Angeles,
there was simply no time or opportunity to focus on what she had grown to love — working with actual plants. This interest had developed into more than just a utilitarian hobby, it was something she found that she excelled at — something that became all the sweeter when she began combining it with photography, her other passion. To Michelle, her approach to one activity actually informs the other. Her challenge is to grow the perfect plant and then take a perfect picture of it. “I find the one, you know, the one, and then that’s what hits my feed. And only the best of the best hits my feed. That goes into my growing. I can only display those beautiful pictures, and I can only help CBD-needing patients if I’m growing the best of the best and utilizing good practices.” This focus on the best has recently paid off in a big way for Michelle. “This last year, I got a strain named after me. Clone-only, the breeder wants me to send it to him so he can make seeds of it … but I think I kind of want to keep it exclusive for another year and just release flowers and oil. Then maybe we’ll do seeds.” Michelle’s strain is called Reefer Breath, and is a cross created by Bay Exclusives Seeds. The parents are OG Kush Breath crossed with a selected
Five Things You Need to Know Before You Grow By Josh Browning
1. “Read about the process, and especially read about how to grow.”
Michelle explained, “One of the things that I notice a lot of people do is they’ll get the plant before they know anything about cultivating … . If you know what you’re getting into before you get into it, you’ll save yourself a lot of heartache.” Michelle specifically noted four books to read and that these are not once-through reads — each time something new can be found. “Marijuana Horticulture Fundamentals” by K of Trichome Technologies is one of her favorites. “The way the information is given and displayed is flawless, very detailed bits that could mean success and failure,” she said. “It’s the little things that count and this book explains a lot of the little things that are left out in many books. Hell, he even gives you a sample to begin writing out daily logs of everything done in the garden, which is a must for multi-site growers.” Other books on her must-read list include Ed Rosenthal’s “Marijuana Grower’s Handbook” and Jorge Cervantes’“The Cannabis Grow Bible: The Definitive Guide to Growing Marijuana for Recreational and Medical Use” and “Marijuana Horticulture: The Indoor/Outdoor Medical Grower’s Bible.”
2. “Acknowledge the fact you’re only as strong as your weakest element.”
For Michelle, there are several vital elements — watering, light, CO2/ fresh air, nutrients, genetics, temperature — and it is important to realize each plant is different. “If you are suffering in one of those areas, then you’re not as strong a grower as you’re capable of being.”
3. “Consistency across the board.”
“If you know that your plants are going to be dry in two hours, don’t go to the store, don’t go to a concert for five hours and come back and splash water on them and hope everything will be okay. A good grower knows these plants are your priority, now make them your first.” Use timers and keep a schedule. Plants aren’t going to take care of themselves.
4. Trim properly.
“There is a huge difference in outcome of your product when you practice dry trimming, defoliating or deleafing, before harvesting and completely wet trimming. Wet trimming is removing everything but the buds prior to hanging dry, leading to handling and destroying trichomes during the process. Dry trimming prior to harvesting entails removing all large fan leaves and any leaves that have no trichomes, leaving only the sugar leaf behind to hang dry. This protects and encases the buds during the drying process.” Everything with sugar or resin should stay. “It’s also important to know what to prune when growing to allow the plant to thrive. Anything that’s dead or dying needs to go, dead foliage promotes rot and mold … . I don’t wet trim, but I definitely defoliate.”
5. Don’t get discouraged.
“There is always a second round … . If you’ve gotten mold this past round, then you’re going to have to change the environment, step up preventative spraying, get some kind of dehumidifier to keep your humidity down, or add oscillating fans to increase air movement. Always solutions and never problems.”
Bay Exclusives OG. “I found this strain from seed by accident,” she said. “It’s one of those things where sure, there are many many OGs out there, but [my partner] and I just got lucky enough to get this early. You can grow for 20 years and finally find that one, and I’ve only been growing for three or four and I got it.” The fact that Michelle is such a conscientious and meticulous grower is the reason that, for now, she has kept her campus small. The plant is the most important thing to her, and this is what she focuses on when talking to and working with investors. To her it is not just important that their personalities match, but that their sensibilities match as well. Michelle realizes this goes the other way as well. “The genetics that I have, the connections that I’ve made, and the cannabis intellectual property I’ve obtained, that’s what makes me valuable.” The actual genetics and strains are her biggest priority, and Michelle makes it a point to know exactly what she is growing. “They’re dialed in … we’ve had [the plants] for so long I can tell you where they came from,” Michelle said. “Just good, solid lineage.” When asked about future plans, Michelle is the first to note that nothing is set in stone but her plans are to keep doing what she’s doing and slowly leverage it into something bigger so long as she never loses contact with cultivating. “It’d be great to have a Rad Reefer Company dispensary. That’s what I hope to do. I don’t want to run it, I just want to grow for it. Can’t paper-push anymore.” In addition to following her on Instagram, Michelle’s work may be found at radreefercompany.com. March 2017 |
By Anne Wallace
or medical cannabis investors, intriguing opportunities are emerging in the production and testing of cannabis extracts, as well as the manufacture of products using those concentrates. Several legal and business developments may open up investment options to a wider universe of potential investors:
November’s election added Arkansas, Florida and North Dakota to the list of states where some form of medical cannabis is permitted, bringing the country’s total to 28 states, plus Washington, D.C.;
The production of medicine is highly dependent on the availability of cannabis extracts for both medical and legal reasons;
State laws increasingly mandate testing and certification for both medicinal and adult use cannabis, particularly with respect to pesticides and other impurities; and
The sector involves companies that are poised to market laboratory quality assurance and qualitycontrol services, even though not cannabis-specific.
This may be a chance for traditional equity investors to become involved, in addition to the angel investors and venture capitalists who, from the outset, have fueled the growth of the legal medical cannabis industry.
Cannabis extracts are significantly more potent than whole-plant cannabis and are believed to be more effective for patients suffering from certain conditions. The characteristics of the concentrate are similar to those of the source strain, but effects are magnified as concentration by weight increases. Concentrated extracts are commonly used in tinctures, oils and medicinal edibles. Some states limit the ways that medicinal cannabis may be consumed. In New York, for example, only food, oil and pills are permitted. Smoking also may be counter-indicated for specific conditions or patients. Extracts and concentrates, therefore, seem to be poised to assume an increasing role in medical cannabis.
Based on the superior bioavailability of the cannabinoids in extracts, Brandon Gold of Focused Stock Trader is bullish on their potential. “[Extracts are] where it’s really going to start to help people,” he noted in a conversation with Marijuana Industry News. However he sees state regulation as one of the key factors affecting profitability of the extraction sector.
The states with the oldest recreational cannabis programs tend to have the most thoroughly developed regulatory requirements for contaminant testing. In the state of Washington, for example, private, certified labs conduct tests for mold, bacteria, insects and potency. Routine testing for pesticides is expected to begin in 2017. Colorado requires batch testing for microbials, residual solvents, metals and a number of other contaminants. Certified labs are scheduled to begin testing for pesticides, but as of late 2016 labs were still being accredited to handle the tests. Oregon has similar rules for contaminant testing and similar issues with pesticide use. Similar schemes for the testing of extracts and the medical products created with those extracts seem likely. It is clear that, with respect to both
extraction and testing, trained professionals and accredited laboratories will play an important role. But this is an area where much of the basic science and protocols already exist or can be adapted from the existing requirements of pure food and drug laws. Enterprises that have not previously been involved with medical cannabis may have a greater role to play in the near future.
Absent re-scheduling or de-scheduling, medical cannabis is still largely an arena for private investors, who are nonetheless far less spooked than they were in the early days of legal cannabis. In 2012, for example, it took Privateer Holdings Inc., a Seattle-based private equity firm, 18 months to raise $7 million for investment in the medical cannabis sector. In November 2016, the firm announced that it had just raised $40 million in convertible debt, bringing its fundraising total to $122 million. Privateer’s portfolio of companies includes Tilray and Marley Natural, both of which offer extracts to support easy ingestion and more precise dosage. Tilray offers liquid capsules March 2017 |
available in sativa, indica, a hybrid formulation and two varieties of CBD. The company’s drops give patients the option of infusing cannabis into a variety of foods. Marley Natural offers sativa, indica, hybrid and CBD-rich cannabis oil cartridges, as well as hemp oil body care products including a blended oil, lotions and salves. Data is still scarce about the relative rate of return on investment on flower and extract operations, but Craig Frank, Chairman and CEO of Kaya Holdings (OTCQB:KAYS), sees the situation as something of a toss-up: “The extractor who does not have his own supply of flower is buying flower at a mark-up to farmer’s costs. So that would be one factor affecting cost of goods. On the other hand, … the extractor is selling a premium product at a higher margin, and competing against fewer manufacturers. [This] could mean that ROI could favor an extractor.”
Some cannabis-specific businesses that offer extracts, like Kaya Holdings (KAYS) and Terra Tech
(OTCQX:TRTC), have gone public in an effort to raise capital. In an interview with Marijuana Industry News, Frank said, “One hundred percent of [Kaya Holdings’] revenue comes from activities associated with the cultivation and resale of cannabis.” It is the first fully reporting U.S. public company to own and operate a vertically integrated seed-tosale legal cannabis enterprise in the United States. Operations in Oregon include its Kaya Shack dispensaries, medical cannabis grow operations, the manufacturing of proprietary cannabis products and the research and development of medical grade cannabis strains and extracts. The extracts portion of its business includes butane hash oil and CO2 oil extract, wax and shatter, which range in potency from approximately 40% to more than 80% THC, as well as oils, tinctures, high-CBD/low-THC strains and an assortment of candies, cookies and cakes for patients who do not smoke. Terra Tech describes itself as a vertically integrated cannabis-focused agriculture company. IVXX, Inc., its
wholly owned subsidiary, produces medical cannabis extracts for regulated medical cannabis dispensaries. Products available under the IVXX brand include shatter, wax and oil concentrates. Terra Tech’s Blüm retail medical cannabis facilities focus on providing medical cannabis to patients who seek alternative treatments for chronic medical conditions. Blüm offers flowers, concentrates and edibles through its dispensary in Oakland, Calif., and its multiple dispensaries in Nevada. The Oakland dispensary serves more than 42,000 registered patients and sees close to 1,000 patients each day. Although Terra Tech’s share price dipped in the aftermath of the election, sales from concentrates were a significant source of growth during the first half of 2016, increasing 42% between January and May 2016.
Late in 2015, Bank of America Merrill Lynch identified several companies that it believed could benefit in a cannabis boom because of existing
expertise relevant — but not limited — to the cannabis industry. On Nov. 21, 2016, Bloomberg Intelligence, the research and analysis arm of financial news and data company Bloomberg L.P., hosted an event for Wall Street analysts, investors and market speculators titled, “Cannabis Trends & Legalization.” Jeffrey Friedland, of Friedland Global Capital, one of the participants in the forum, focused on the importance of science as a core growth driver for the medical cannabis industry of the future. “I’ve concluded that the real money will be made by companies that not only harness science to differentiate their products, but are also able to get those products into the marketplace.” Mainstream scientific and laboratory companies may be among the businesses best situated to benefit from the growing legalization of medical cannabis. These fall into multiple categories. Several have positions in the gas chromatography and highperformance/ultra-high-performance liquid chromatography markets, such as Agilent Technologies (NYSE:A) and Waters Corporation (NYSE:WAT). Since 1999, Agilent has focused on life sciences, diagnostics and applied chemical markets in six key areas,
including food, environmental and forensics, pharmaceutical, diagnostics, research, chemical and energy. Waters Corp., a laboratory analytical instrument and software company, markets to laboratorydependent organizations in six areas, including liquid chromatography, mass spectrometry, supercritical fluid chromatography, laboratory informatics, rheometry and microcalorimetry. It is one of the few mainstream companies that appears regularly at cannabis industry conventions. The Merrill Lynch report also focused on several companies that it sees as key providers of qualityassurance/quality-control tools. Among these were: • Thermo Fisher Scientific (NYSE:TMO); • PerkinElmer (NYSE:PKI); • Danaher Corp. (NYSE:DHR); and • Bruker Corp. (NASDAQ:BRKR). With revenues of $17 billion and more than 50,000 employees in 50 countries, Thermo Fisher Scientific describes its mission as enabling customers to accelerate life sciences research, solve complex analytical challenges, improve patient diagnostics and increase laboratory productivity. Founded in 1947, PerkinElmer describes its mission as to detect environmental threats, ensure food quality and safety, and develop
drugs and therapies faster, among other tasks. Danaher touts the experience of its product identification businesses in ensuring the freshness, consistency, and accurate labeling and tracking of consumer, industrial and pharmaceutical products throughout the supply chain. Founded in Germany in 1961, Bruker Corp. now has nearly $2 billion in revenues and more than 6,000 employees worldwide. Its corporate materials describe it as a global manufacturer of high-end analytical instruments used within the academic, government, pharma/biotech, clinical diagnostic and industrial markets. Apeks Supercritical, in some ways, is a middle ground between the industrial, laboratory giants eyed by Merrill Lynch and the startup world of cannabis-specific businesses. It builds fully automated subcritical and supercritical botanical oil extraction systems that use liquid CO2 as a solvent. Its systems may be built to extract any botanical material, but the majority of Apeks’ business comes from the cannabis industry. For investors who are curious, but not necessarily committed to medical cannabis, or for those without the deep pockets of private equity lenders, mainline laboratory and scientific businesses may be a way to participate in the cannabis boom. In any event, in a rapidly developing industry in which extracts and quality testing will play an increased role, investors will likely find increased opportunities. Although many of these companies do not fully embrace the cannabis industry, they have been more than willing to participate in an ancillary fashion. Medical cannabis investors who are willing to take the plunge into more volatile publicly traded stocks have an increasing array of options, where extracts and concentrates seem poised to drive corporate growth. Private equity investors, however, still play a formative role in the emerging world of medical cannabis extracts.
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Marijuana Industry Jon Cooper, Ebbu Product to Watch 2017
Nicholas Kovacevich, Kush Bottles U.S. Public Cannabis Company CEO of the Year
Jared Barry , Troy Nihart, Isodiol CBD Product of the Year
Lilach Power, The Giving Tree Wellness Center Woman Executive of the Year
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March 2017 |
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in State-Legal Cannabis BY C h r i s t o p h e r Fa i l l e
randing, to start at the beginning, is the process by which an entrepreneur or company creates a unique name and image for its product or service in the minds of actual and potential customers. A newcomer into a crowded marketplace is in a near-impossible position unless he can differentiate himself. These observations are common in the world of “white-market’ products – toothpastes, breakfast cereals and tire brands sell themselves as the “Look Ma! No cavities!” product, or the “Breakfast of champions” or the tire associated with a famous blimp. And so forth. They build shelf space in supermarkets and meme space in the minds of the customers. The same observation, the need for intelligent self-conscious branding, is less obvious in the world of cannabis only because it has been a black market for so long.
But it is black market no longer. In November 2016 alone, California, Nevada, Massachusetts and Maine all voted to legalize adult recreational use, adding to the list of states where state authorities treat marijuana as akin to alcohol. Colorado, Washington, Oregon, and Alaska were already there. Several other states allow medicinal use, and that list, too, grew this past November. The market is ripe for professionalization, and for the differentiation associated with branding. Otherwise, the unbranded are destined to disappear in the ever-growing supply of “product” and products. Entrepreneurs ready to consider the issue should attend to the following five points:
1. Money is not always the bottom line. Yes, the cannabis community is big. It involves billions of dollars and millions of patients. On the other hand, it still has a small town feel to it. If one is living in a small town one must be concerned with what the neighbors will think. So please, don’t be the town jerk. Don’t act as if money is the bottom line. Reputations can open doors, and can certainly close them, regardless of the merits of your product.
2. Know your customer. An entrepreneur in this market should know his end user, and the whole supply-chain on the way to that end user. From the first business plan onward, he should be asking himself, “Am I giving the best possible product to the consumer? Am I providing the highest margins to the retailers? Where’s my value?”
3. Work the full circuit. Budding companies in cannabis should consider the Tobacco Product
The unbranded are destined to disappear in the ever-growing supply of “product” and products.
Expo in Las Vegas, Nev., the Champs trade shows and the American Glass Expo as branding platforms. Don’t be deterred if a particular expo supports a product or service that seems a bit apart from what you are selling. Remember that this is a small town. One ought to work the whole circuit and you will be surprised to see the same faces at every show. If a vendor wants to reach the ultimate consumer, it’s necessary to work through the network of social media influencers. Consider social media platform such as Instagram. Can one just create an account and await reaction? Unfortunately, it doesn’t work that way. Websites and accounts don’t have magical magnetic powers, regardless of the quality of content put out. Become familiar with the key hashtags and hangouts. Market on multiple fronts and follow up. An account with a lot of followers might carry less weight than a casual observer would know; and an account with fewer followers may have a stronger connection with its audience. A balanced approach will incorporate influencers of different ranges, the 0-5k, 2-15k and 15k+ can each play a role.
4. Work the distribution issues. Does a product contain THC? In California especially, that means the vendor will have to do some extra work. There is only one legal distribution company and that is State Distribution, located in Southern California. To protect yourself, your family and your company, realizing that finding a way to get your THC product into the hands of the consumer can
be a dangerous and illegal task without the help of a licensed distributor. Even if it your product doesn’t contain THC, distribution is no cakewalk. Be prepared to work at it. Once a vendor has lined up a distributor, it can be a great help in building a brand. Accepting payment is another tricky feat. There are merchant processors out there that will work with cannabis companies. Do your homework. You don’t have to pay more than market price.
5. Discretion is necessary in social media. Facebook and Instagram are effective places to reach an audience. But neither platform is supportive of the cannabis industry, and either can deliver a painful blow by closing out an account that offends its sensibilities. So discretion is the better part of valor. Certain key words and phrases are to be avoided. If a vendor hires a marketing agency, it should not assume the agency understands this. It should make certain that they do, and find out how they have dealt with the issue for other brands.
A Final Thought The final words on marketing belong to Jarrod Smith, the founder of Rolling Paper Depot*, one of the premier online cannabis accessory storefronts. “Whatever part of the cannabis industry you are passionate about, stick with it and don’t give up. You must carry that passion throughout every action and decision that you make and your customers will feel your passion in the products and brands you create. Love what you do and strive to be the best at it.” *MJIC owns Rolling Paper Depot.
March 2017 |
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Marijuana Industry News is a leader in updated regulatory changes and finance with general interest stories for those that "touch the plant"...
Published on Mar 3, 2017
Marijuana Industry News is a leader in updated regulatory changes and finance with general interest stories for those that "touch the plant"...