Answering questions following a speech in Richmond, Virginia, Attorney General Jeff Sessions told reporters he thinks the Cole Memo is a valid way to deal with state cannabis laws and said medical cannabis is “hyped, maybe too much.” According to a MassRoots blog post by Tom Angell, Sessions spoke yesterday regarding cannabis, addressing it as he tip-toed around his previous statements, like calling cannabis use unhealthy or the infamous “Good people don’t smoke marijuana” line.
This time around, Sessions’ words on legal cannabis were more carefully chosen. “The Cole Memorandum set up some policies under President Obama’s Department of Justice about how cases should be selected in those states and what would be appropriate for federal prosecution, much of which I think is valid,” Sessions told reporters. The Cole Memo essentially set up a framework for states with legal cannabis laws to avoid federal enforcement of the Controlled Substances Act.
These comments do fall in line with some of his previous statements, like suggesting he wants to uphold federal law. During the speech in Richmond, Sessions denied any possibility that cannabis could be a solution to the opioid crisis. “I reject the idea that America will be a better place if marijuana is sold in every corner store,” says Sessions. “And I am astonished to hear people suggest that we can solve our heroin crisis by legalizing marijuana – so people can trade one life-wrecking dependency for another that’s only slightly less awful.” These statements echo much of what White House press secretary Sean Spicer said weeks ago, citing the opioid crisis as possibly linked to recreational cannabis consumption.
Sessions admitted to reporters that he acknowledges the benefits of medical cannabis, but says he is still skeptical of the idea, saying it has been overhyped. “It’s possible that some dosages can be constructed in a way that might be beneficial,” says Sessions. “But if you ever just smoke marijuana, for example, where you have no idea how much THC you’re getting it’s probably not a good way to administer a medicinal amount- so, forgive me if I’m a bit dubious about that.” Sessions pontificating the medical efficacy of delivery methods for cannabinoids could suggest he is trying to familiarize himself more with the science behind medical cannabis.
According to a Politico article, Sessions privately told senators that he would respect states’ rights on the issue and uphold Obama-era policies, perhaps referring to the Cole Memo. While Sessions’ most recent remarks could signal a less aggressive approach toward legal cannabis, he still makes his position clear as a Drug War stalwart. “Our nation needs to say clearly once again that using drugs will destroy your life,” Says Sessions.
In a highly competitive market, dispensaries use wide product selections, competitive prices, rewards and loyalty programs to stay relevant and attract new customers. Many of those tools used to make the retail space more efficient require analytics to stay on top of their performance metrics.
At their SE 7th Ave location in Portland, Oregon, Cannabliss & Co. uses Baker software to better connect with their customers and track sales. According to Kevin Mahoney, manager of that dispensary, they use Baker’s software for things like their online menu, online ordering, text alerts and a rewards program.
Located in an historic firehouse built in 1913, Cannabliss & Co. was Oregon’s very first medical cannabis dispensary. Now that they offer both recreational and medical cannabis, their product inventory has expanded, their sales have grown and they have a wider customer base.
After using Baker’s software platform for almost a year now, Mahoney says he has seen great ROI on text alerts and the analytics. The online ordering and menu features have not only highlighted sales trends, but have made budtender-customer interactions easier. “We don’t want our budtender using the menu as a focal point of the conversation, but this allows for us to highlight particular specials or strains on our menu that gets eye attention right when the customer gets in,” says Mahoney. “Moving past the point of sale, it allows another conversation to happen organically, which keeps the customer engaged.”
On average, Baker sees conversion rates close to a 5% range per campaign. “That check in option is phenomenal; we get to see how many people actually came into the store from any given text alert,” says Mahoney. “In my mind, text alerts are preferable to email alerts; they can’t be marked as spam, it is easy to delete or opt out and takes much less time.”
Mahoney says the online ordering feature that Baker offers is a big selling point too. “Having an ordering service is absolutely terrific,” says Mahoney. “They can come in and out in less than five minutes with their full order by using the online ordering portal.” Mahoney says they see a real draw in this feature because it lets customers treat their dispensary like a takeout window at a restaurant.
Baker just launched a software platform designed for delivery service that a dispensary in Bend, Oregon has been using for two months now. With Portland legalizing cannabis delivery services recently, Mahoney is eyeing Baker’s software for his online ordering and delivery. “When the time comes, that is something we are very interested in pursuing.”
In August of 2016, Baker secured $1.6 million in seed funding, led by Former Salesforce Executive Michael Lazerow, according to a press release. “Baker has created a solution that is clean and easy to use and can help dispensary owners engage their shoppers like never before – online, mobile, social and in-store,” says Lazerow. “I witnessed first-hand how Salesforce supercharges its customers’ businesses and I’m inspired to see Baker driving the entire cannabis industry forward with this same intelligent approach.” In 18 months of business, Baker has worked with hundreds of dispensaries, helping them build better connections with over 100,000 customers. At Baker, we believe the cannabis shopping experience should be as comfortable and personalized as it has become in every other retail environment,” says Joel Milton, chief executive officer at Baker. “With expertise in cannabis, data and technology we have created an industry-specific tool that allows dispensaries and brands engage with customers and build brand loyalty through a personalized shopping experience.”
According to Eli Sklarin, director of marketing at Baker, the number one reason why patients and customers choose a dispensary is because of products on the shelf. “We originally started the platform in 2014 so people could order ahead and wouldn’t have to wait in lines at the dispensary,” says Sklarin. “In 2015, we saw more dispensaries than fast food establishments in many cities. Once inventory started to settle down, we saw a need for the dispensary to better connect with their customers.” The three core products that Baker offers are online ordering, connect SMS & email and the check in & loyalty program.
Their entire suite of software options is specific to the cannabis retail space. “Our customizable program is designed to help dispensaries catch customers and keep them coming back,” says Sklarin. “The software can give a snapshot of who their customers are, insights into the overall health of their dispensary, sales per day of the week, monthly promotions and other basic analytics that help them understand their customers.” Things like strain alerts can help retain customers, allowing dispensaries to notify certain groups of customers when products are back in stock. Whether it’s a customer who prefers a particular brand of edibles or concentrates, these software tools can help dispensaries get the right message to the right customer.
During a press conference on Thursday, February 23rd, White House press secretary Sean Spicer made a number of comments hinting at the Trump administration’s stance on legal cannabis. He identified a clear distinction that he makes between medical and recreational cannabis laws, while mentioning President Trump’s previous statements on medical cannabis. Roby Brock, a journalist at Arkansas news website Talk Business & Politics, asked a question about the state and federal conflict in cannabis laws. “The Obama administration chose not to strictly enforce those federal marijuana laws,” says Brock. “My question to you is with Jeff Sessions over at the Department of Justice as AG, what is going to be the Trump administration’s position on marijuana legalization where it is in a state-federal conflict like this?”
Sean Spicer replied with more of the same of his previous statements regarding the Trump administration’s stance on cannabis legalization. “There are two distinct issues here: medical marijuana and recreational marijuana,” says Spicer. “I think medical marijuana- I’ve said before that the president understands the pain and suffering that many people go through, who are facing especially terminal diseases and the comfort that some of these drugs, including medical marijuana, can bring to them. And that’s one that congress, through a rider in 2011, I think put in the appropriations bill saying the Department of Justice wouldn’t be funded to go after them.” The rider in the appropriations bill he is referring to is the Rohrabacher–Farr amendment that became law in December of 2014, but must be renewed each fiscal year. That piece of legislation provides for exactly what he said- preventing the Justice Department from using funds for activity that might interfere with state’s legal medical cannabis programs. Regarding the actual conflict between federal and state laws, Spicer said “I do believe you will see greater enforcement of it,” referring to the Department of Justice enforcing the Controlled Substances Act.
Spicer went on to make some questionably ill-informed remarks, including linking recreational cannabis use to the opioid crisis. “There is a big difference between that [medical marijuana] and recreational marijuana,” says Spicer. “And I think that when you see something like the opioid addiction crisis blossoming in so many states around this country, the last thing we should be doing is encouraging people- there is still a federal law that we need to abide by… When it comes to recreational marijuana and other drugs of that nature.” Though those comments are unclear, it could suggest that Mr. Spicer believes in a possible link between recreational cannabis use and the opioid crisis, or at least grouping them in the same category. While there is not much evidence suggesting of the link he is referring to, a study published in 2014 in JAMA Internal Medicine, a peer-reviewed medical journal published by the American Medical Association, suggests a possible link between medical cannabis laws and the decrease in opioid overdoses.
Spicer continued to emphasize his distinction between medical and recreational use of cannabis. “I think there is a big difference between medical marijuana, which states where it is allowed, in accordance with the appropriations rider, have set forth a process to administer and regulate that usage versus recreational marijuana, and that is a very very different subject,” says Spicer. National Cannabis Industry Association executive director Aaron Smith issued a statement regarding Spicer’s comments.
“It would be a mistake for the Department of Justice to overthrow the will of the voters and state governments who have created carefully regulated adult-use marijuana programs,” says Smith. “It would represent a rejection of the values of economic growth, limited government, and respect for federalism that Republicans claim to embrace.” Smith says he was very disappointed when he heard press secretary Spicer relate cannabis to opioid addiction. “Science has discredited the idea that marijuana serves as any kind of gateway drug, and the addiction and death rates associated with opioids simply do not occur in any way with cannabis,” says Smith. In October 2016, NCIA published a report identifying cannabis as a possible solution to the opioid crisis.
Isaac Dietrich, chief executive officer of MassRoots, a social networking platform for medical cannabis, sees Spicer’s words having a direct impact on his business. “I have a feeling our stock is going to take a beating tomorrow, but that just creates an opportunity for investors who believe in the long-term trajectory of the cannabis market,” says Dietrich. He goes on to directly refute Spicer’s statements. “Colorado is one of the only states in the nation that is seeing a decline in opioid deaths — that’s not a coincidence,” says Dietrich. “Cannabis is a healthy alternative to pain pills and heroin, not a gateway to it.”
Press secretary Sean Spicer did not allow a reporter present at the press conference to ask a follow up question on the matter.
Formed in 2015, Outco is a vertically integrated, licensed producer of medical cannabis in Southern California. Outco manages Outliers Collective, the first licensed dispensary continually operating in San Diego County. They operate the first licensed cultivation on Native American land in Southern California, the first cultivation building permit in Southern California and the first licensed extraction facility in San Diego County. Outco is on track to be the largest licensed producer of medical cannabis in Southern California.
The company prides themselves on attention to detail; the well versed team implements real science in their cultivation and extraction processes. Lincoln Fish, co-founder and chief executive officer of Outco, has more than 30 years of experience as an entrepreneur. Before entering the cannabis industry, Linc started and sold companies in the healthcare technology and nutraceutical spaces.
Fish’s experience with FDA regulations in nutraceuticals prepared him for running a business in such a tumultuous, highly regulated environment like cannabis. “One thing I took from the nutraceutical industry is how to present products to consumers and letting them know it is safe, effective and consistent,” says Fish. He says he noticed a serious lack of consistency in products. They tested 25 different vape cartridges, with their own oil, to find a consistent product they can use and know that consumers will safely and consistently get the same results. “There is a lot of room for more professionals and a lot of room for more science,” says Fish. “We try to position ourselves in a way that is consistent with where we think policy will go so we are very careful with recommendations from a scientific standpoint, patient information and product safety.”
According to Fish, they currently distribute cannabis products to about 75 licensed dispensaries in Orange County, San Diego and Los Angeles. With construction underway at their cultivation facility on Native American land, Fish says they plan to generate roughly 2600 pounds of cannabis each month. Gearing up for that in addition to the expanding recreational market requires some planning in advance, says Fish. Part of that plan is making sure quality controls are in place to keep consistency in the product quality and dosage. They are also actively seeking to open their distribution channels further.
“We are building out a full lab of our own in addition to third party testing to perform internal quality controls,” says Fish. Equipped with their own laboratory instrumentation like HPLC and GC, they hope to establish proper in-house quality controls as well as provide that resource to younger startup companies. As one of the founding partners of Canopy San Diego, an ancillary startup accelerator, Fish sees great potential in working with younger companies to get them off the ground. Fish met Outco’s vice president of extraction, Dr. Markus Roggen, at a Canopy San Diego event. It was there that they had the idea to build a startup accelerator for companies that actually touch the plant- extractors, cultivators and infused-product manufacturers, as opposed to a startup accelerator that would only help ancillary businesses.
Dr. Roggen, who is an organic chemist by training, heads up Outco’s supercritical CO2 extraction operation. “I came to the ‘art’ of cannabis extraction with an open, yet scientifically focused mind,” says Dr. Roggen. “My approach was to look past the myths and stories about extraction methods and focus on finding data, as there really wasn’t much available. I therefore, from the beginning, started to study the capabilities of our extraction equipment by chemometric methods.” Chemometrics is the science of relating measurements made on a chemical system or process to the state of the system via applications of mathematical methods. “Already the first sets of experiments showed that long-held beliefs in the cannabis community were inaccurate,” says Dr. Roggen. “For example the particle size of extracted material matters. Or that it is possible to preserve and even isolate terpenes by CO2 extraction methods.” With plans to have a full plant and analytical chemistry laboratory on site, they hope to perform more research that focuses on optimizing extraction processes.
Dr. Allison Justice leads their cultivation team with a background in greenhouse management and commercial horticulture. Dr. Justice says plants are grown, starting at a young age (seed or vegetative cutting), with the protection of biological control agents. “Biological control is a management strategy that entails the release of beneficial insects or fungi, such as parasitoids and predators, in order to suppress or regulate insect populations in greenhouses and grow rooms,” says Dr. Justice.
When implemented properly, this eliminates the need to use synthetic pesticides. “Biological control agents are not put in place to eradicate pest populations yet are applied as preventives to minimize plant damage and maintain their own populations.” They are constantly evaluating light types, spectrum and intensity to determine optimal ranges, according to Dr. Justice. They don’t use any pre-mixed “cannabis” nutrient supplements for their plants, instead they design an experiment to determine the desired levels and ratios of essential plant nutrients. “We have found it crucial to determine what ratios of nutrients the plant actually needs and by knowing this, we know how to manipulate the recipe determined by the plant’s given nutritional symptoms,” says Dr. Justice. Every type of adjustment in cultivation and extraction is based on results from experimentation rooted in legitimate science. Instead of guessing when it might be time to harvest, they use a water activity meter, logging and recording all the data to determine the appropriate time to trim and cure plants. Performing analytical testing at every step is key, says Fish.
Looking toward the recreational market, Fish sees an obvious opportunity to expand their wholesale operations substantially, with several larger new cultivation projects planned. “The key though is to produce flower and concentrate offerings with the same standards we employ for medical cannabis,” says Fish.
Members of Congress last week announced the formation of a ‘Congressional Cannabis Caucus’ in order to organize and affect cannabis policy at the federal level. Representatives Earl Blumenauer (D-OR), Dana Rohrabacher (R-CA), Jared Polis (D-CO) and Don Young (R-AK) announced the creation of the caucus on February 16th. Cannabis advocacy and drug policy groups were quick to commend the formation of the organization.
In a joint statement issued on Friday, the National Cannabis Industry Association, the Marijuana Policy Project, the Drug Policy Alliance, NORML, Americans for Safe Access, Students for Sensible Drug Policy, Law Enforcement Action Partnership, Doctors for Cannabis Regulation, and Clergy for a New Drug Policy expressed commendation and excitement for the new group. “We commend Representatives Blumenauer, Rohrabacher, Polis, and Young for their leadership on the issue of cannabis policy,” reads the statement. “The establishment of a Cannabis Caucus will allow members from both parties, who represent diverse constituencies from around the country, to join together for the purpose of advancing sensible cannabis policy reform. It will also facilitate efforts to ease the tension between federal prohibition laws and state laws that regulate cannabis for medical and adult use.”
The members of Congress that formed the caucus all represent constituents in states where cannabis is legal for medical and adult use. “The formation of this caucus is a testament to how far our country has come on the issue of cannabis policy,” says the joint statement by the drug policy reform groups. “We look forward to working with caucus members to translate this growing public sentiment into sound public policy.” According to their statement, 44 states so far have adopted laws effecting cannabis prohibition on the state level, representing 95% of the U.S. House of Representatives and 88% of the Senate.
Representatives Blumenauer and Rohrabacher have been prominent cannabis policy reform advocates in the past. Blumenauer supported the bill to legalize adult use cannabis in Oregon back in 2014 and Rohrabacher introduced the Rohrabacher–Farr amendment to Congress, which prohibits the Justice Department from spending money on interfering with state medical cannabis laws.
According to an article on Roll Call, Blumenauer says the caucus will focus on more medical research and the tax and banking regulations hurting cannabis businesses.
Update: With 100% reporting (589 of 589 precincts), voters in Maine passed Question 1, legalizing recreational cannabis by a very narrow margin of 50.2% to 49.8% (378,288 in favor and 375,668 against is a margin of only 2,620 votes)
Voters in California, Massachusetts, Maine and Nevada passed ballot initiatives legalizing the recreational use of cannabis, creating huge new markets for the cannabis industry overnight. Voters in North Dakota, Florida, Montana and Arkansas passed ballot initiatives to legalize forms of medical cannabis. Voters by a margin of 52.2% to 47.8% rejected Arizona’s Proposition 205, which would have legalized recreational cannabis.
With 100% of the votes in for Maine’s Question 1, voters narrowly passed legalizing recreational cannabis, the polls show it won by a very slim margin, less than 3,000 votes.
New Frontier Data and Arcview Market Research released an Election Day update to their growth projections for the cannabis industry by 2020. The release projects: “The legalization of cannabis in California, Massachusetts, Nevada, Florida, Arkansas and North Dakota will result in new markets that account for $7.1 billion in sales by 2020. We project the overall U.S. cannabis market will exceed $20.9 billion by 2020.” Those numbers include overall cannabis sales and assume the markets are all fully operational by 2018.
According to Giadha DeCarcer, founder and chief executive officer of New Frontier, there is overwhelming support for medical cannabis and a majority of Americans are in favor of legalizing recreational cannabis as well. “The ten initiatives on the ballot reflect the accelerating public debate on legal cannabis access,” says DeCarcer. “The passage of California’s adult use measure and Florida’s medical initiative expand legal access into two of the country’s most populous states.” The market potential is notably enormous in California, it currently being the 6th largest economy in the world. “Additionally, the passage of the measure in Massachusetts opens the first adult use market in the Northeast extending the reach of legal adult use access from coast to coast,” says DeCarcer. “The passage of the measures in Arkansas and North Dakota shows that public support on this issue is not solely confined to urban, liberal markets but extends into conservative rural states as well.”
According to the release, by 2020 California could reach a total market size of $7.6B and Massachusetts could grow to $1.1B. Massachusetts being the first mover in the Northeast to legalize recreational cannabis will be watched very closely by a number of surrounding states that appeared bullish on cannabis legalization previously.
Leslie Bocskor, president and founder of Electrum Partners, believes the Election Day results will bring an influx of investing opportunities to the industry. “We are going to see a diverse approach from the irrationally exuberant to the sophisticated and experienced investor and entrepreneur getting involved, creating businesses and investing in the industry that will create innovation, jobs, wealth and tax revenue far beyond the consensus expectations,” says Bocksor. “The cannabis industry is more than one industry; it is an entire ecosystem, impacting so many verticals, such as agriculture, industrial chemicals from hemp, pharmaceuticals, nutraceuticals and more. We see the funding of innovation that might have been absent without the velocity and heft that has come from this phenomenon,” adds Bocksor. As these newly legalized markets begin to launch, it will require a considerable amount of time to see the industry flesh out in each new state.
Donald Trump winning the presidential election and the GOP retaining control over the House and Senate could mean a lot of uncertainties for the future of the cannabis industry on a national scale. President-elect Trump has previously flip-flopped on the issue of cannabis legalization, but has said in the past he favors leaving the issue of medical use up to the states, advocating for access to medical cannabis, while recently saying he opposes regulating cannabis for adult use, according to the Marijuana Policy Project. The MPP gave him a C+ grade for his views toward cannabis.
On The O’Reilly Factor in February 2016, Trump told the conservative political commentator that he supports medical cannabis while opposing the recreational use. “I’m in favor of it [access to medical cannabis] a hundred percent. But what you are talking about [recreational use], perhaps not. It’s causing a lot of problems out there [in Colorado],” says Trump. It is still unclear at this time exactly what Trump’s policy will be for the now 28 states that have some form of legal cannabis.
Aaron Smith, executive director of the National Cannabis Industry Association (NCIA), appeared optimistic regarding the outcomes of Election Day. “More than 16 million voters, including in two of the three most populated states in the nation, chose legal, regulated cannabis programs that promote safety, boost the economy, help sick patients and address social injustices,” says Smith. In the press release, the NCIA spelled out their priorities for congressional action on cannabis policy: Opening up bank access for state-compliant cannabis businesses, ending the effects of federal tax code Section 280E on cannabis businesses and removing cannabis from the Controlled Substances Act via descheduling. “Last night’s results send a simple message – the tipping point has come,” says Smith.
California’s tradition of social and political experimentation has made it the national leader in areas ranging from environmentalism and social justice to technology. Now it is poised to make the same far-reaching transformations in the cannabis industry.
As one of the world’s top ten economies and the nation’s most populated state (having a population of 38 million), California could propel the decriminalized recreational cannabis industry to $6.5 billion in 2020, according to a report by ArcView Group and New Frontier.
At the same time, California is in the process of moving from state to local zoning control, as far as issuing the OK to become licensed, effective Jan. 18, 2018. This means collectives and dispensaries have to obtain local approval before they receive a state license. It also puts greater pressure on gray market operations to become licensed.
On the regulatory front, the state is also heading toward a historic vote in November 2016 in the form of Proposition 64. This will open up the customer base to all Californians. It has a similar licensing path as the medical regulations the Governor signed last year, except it allows vertical integration between growers and dispensaries, which is not allowed under the medical regulations, except in very limited circumstances.
“My bet is the demand will outweigh the supply for a while and the legal cannabis businesses that are licensed by the locals and have their supply chain in place will end up profiting,” says Andrew Hay of Frontera Accounting, a cannabis-focused CPA firm based in California under the umbrella of the Frontera business group.
A Huge Market Awaits
If the Adult Use of Marijuana Act passes and is enacted by 2018, the state’s legal cannabis sales are projected to hit $1.6 billion in their first year, the ArcView and New Frontier market report said. Even without the new expanded legislation and working amid a fractured medical cannabis regulatory environment, California now accounts for about half of all the legal cannabis sales nationwide, according to the report.
At the same time, the state is well positioned to capitalize on new technology and financing from Silicon Valley in terms of human talent, money and the applications of new technology in both the medical and recreational sectors. One driving force will come from the Adult Use of Marijuana Act, which mandates that 10 percent of sales tax collected on cannabis sales be re-directed towards medical research and drug abuse programs.
In addition, according to Marijuana Politics, the expected tax windfall is slated to be divided up among a variety of programs: $10 million to public universities, $10 million to business and economic development, $3 million to California Highway Patrol and $2 million for medical cannabis research at UC San Diego. The remainder will be divided between youth drug education and prevention (60%), environmental protection (20%) and law enforcement (20%).
This flow of new funds is expected to propel research into biomedical and applied research, as well as nutraceuticals, or products derived from food sources with extra health benefits in addition to the basic nutritional value found in foods. The driving new ingredients in these products will be derived from cannabis.
Consolidating the Recreational and Medical Markets
Californians will vote in November 2016 to legalize the sale of recreational cannabis. This vote will have serious repercussions since it could mean that the delineation between medical and recreational markets will disappear.
“Should California vote to legalize recreational use this November, we expect implementation of a combined regulated market as soon as 2018,” says Matt Karnes, founder of GreenWave Advisors. Karnes says a merged California market is significant, not only because of its sheer size (it represents about 55% of the U.S. market), but also because it “would mark the first state to implement regulations for a fully legal market without initial oversight of medical use purchases. This could serve as a catalyst for similar action in Nevada, Arizona, Massachusetts and Maine which will also vote to fully legalize cannabis this November.”
In the report, “Mid Year Update: The Metamorphosis of the U.S. Marijuana Market Begins,” the firm said it projects cannabis sales in the U.S. to hit $6.5 billion for 2016. The firm forecasts that by 2021, revenues should reach about $30 billion. This assumes that marijuana will be legal in all 50 states to various degrees. The firm also notes that this year’s election choices can potentially generate $4.2 billion in incremental retail revenues by 2018 and $5.8 billion by 2021.
The Impact on Branding, Music and Culture
As the nation’s culture manufacturing center for films, TV and music, the cannabis business is also expected to shape artistic direction for years to come. Jeff Welsh is a partner at Frontera, a business group that holds a suite of services including the Frontera Law Group, Frontera Advisors, Frontera Accounting and Frontera Entertainment, which is headquartered in Sherman Oaks with a specific focus on the cannabis industry. Welsh says he sees more partnerships between the cannabis industry and mainstream entertainment outlets. Welsh recently signed Chris Sayegh, the herbal chef who uses liquid THC to create elegant restaurant-quality food, in a deal with the United Talent Agency. This marks a cultural breakthrough that links the cannabis and culinary industries.
Because Los Angeles is the largest market, this cultural nexus is expected to contribute more new alliances between celebrity branding and cannabis products.
Luke Stanton, founder and managing partner of Frontera, also said less stringent regulations in the cannabis legal environment could find their way into the regulations and laws of other states that often adopt California laws as templates for their own state. “We have seen this happen in other areas, such as environmental and criminal justice, so it would not be surprising to see our state regulations and policies being enacted in states nationwide, and even in some countries outside of the U.S.,” Stanton says.
California has also been the site of innovative marketing efforts between cannabis patients and growers. The Emerald Exchange held in Malibu, was the first event in cannabis that allowed a direct conversation between Northern California cultivators and the Southern California patient community. According to Michael Katz of Evoxe Laboratories, a California cannabis product manufacturer, “Often the farmers don’t have a chance to really engage with patients, and we wanted everyone to be able to come together, discuss practices, provide information and ultimately support the entire ecosystem of the cannabis community.”
Caveats for Investors
While the California market looks very attractive, it may be the siren’s call for investors until issues related to finding solid companies and taxation are settled.
Since more operations will have to become fully compliant with state regulations, these businesses will face more significant expenses to meet security, taxes, licensing fees, accounting and reporting operations requirements. This could drive smaller operations out of business or force them to become more efficient.
In addition, California’s huge potential and changing regulatory environment is attracting large growers into the state that will compete with smaller, established operations. According to Jonathan Rubin, chief executive officer of Cannabis Benchmarks, these regulations affecting commercial growing vary greatly by municipality. For instance, Mendocino and Humboldt counties have enacted measures to protect local growers, while other counties have not, Rubin says.
In addition, cannabis wholesale prices have been falling due to changes in cultivation methods and variations in supply.
Andrew Hay, a CPA at Frontera Accounting, believes investors should make sure there is a solid plan behind any cannabis company investment. “I’ve seen significant money thrown behind ‘cannabis brands’ with no substance,” Hay says.
“In these cases, the winners are the growers, manufacturers, distributors and dispensaries that are licensed (or are in the process of getting licensed), who pay their taxes and have a successful track record. I wouldn’t invest until you see the underlying operational structure, their tax/regulatory compliance and financials that prove there have been sales,” he says.
Another major problem for investors lies in the IRS accounting regulations. “The biggest hurdle I see facing the California cannabis business is the IRS / IRC 280E, which only allows cost of goods sold deductions. Every cannabis business should be planning their operations around IRC 280E, as there is no way to legitimately survive in the cannabis industry without doing so,” according to Hay.
“IRC 280E is here to stay regardless of California legalization. It is up to the Federal government to fix this issue, which I don’t see happening any time soon. Every cannabis business should hire a CPA and business attorney that work well together to devise a cost accounting strategy to minimize IRC 280E and its impact. Without this, an investor’s profits can go up in smoke to the IRS,” Hay says.
The Supreme Court shut down a lawsuit on Monday brought by two states against Colorado for its recreational cannabis laws. Nebraska and Oklahoma brought the case to the Supreme Court, claiming that the recreational cannabis industry in Colorado is responsible for the illegal exportation of cannabis outside of Colorado. “Colorado has facilitated purchase of marijuana by residents of neighboring states by issuing licenses to an unusually high number of marijuana retailers perched on Colorado’s borders,” the two states told the court in a supplemental brief.
In that brief, the two states argue that Colorado’s cannabis industry led to more cannabis illegally crossing state lines. They argue because of that influx of cannabis, they spend more on law enforcement and state resources, which is a detriment to their citizens. The Supreme Court did not provide an explanation for why they refused to hear the case.
Many view this as a big win for the legal cannabis industry. “The Supreme Court has protected the will of the people today and I believe the court has demonstrated that it understands legal cannabis is a fundamental right,” says Andy Williams, president of Medicine Man, the largest cannabis dispensary in Denver.
Still others see this simply as business as usual. “While I’m pleased to see the Court reject the challenge to Colorado’s cannabis law, this decision isn’t really a win for cannabis advocates- it only maintains the status quo,” says Aaron Herzberg, partner and general counsel at CalCann Holdings, a medical cannabis holding company specializing in real estate and licensing. “We are struggling with diversion in California, so hopefully states will continue to be on track to create a more regulated and taxed environment where cannabis can be manufactured and sold through channels where it is safe and tested,” continues Herzberg.
Adam Koh, chief cultivation officer at Comprehensive Cannabis Consulting (3C), warns that the Court’s denial to hear the case is not necessarily an affirmation of state’s cannabis programs. “It is evident that some diversion is taking place, which of course is against the provisions of the Cole Memorandum,” says Koh. “In order to avoid being implicated in such activities, legally licensed cannabis businesses in Colorado should not take the SCOTUS decision as a signal to relax, but should instead work to make sure that inventory control and record-keeping protocols are in place and even exceed the standards required in state regulations.”
The fact alone that Nebraska and Oklahoma even brought the case to the Supreme Court means that diversion is a major issue facing the cannabis industry. “Only by going above and beyond in terms of compliance will this controversial industry make itself credible in the eyes of its detractors,” says Koh. Some cannabis industry leaders take it upon themselves to help guide rule makers in crafting standards.
Lezli Engelking, founder of the Foundation of Cannabis Unified Standards (FOCUS), believes the Cole Memo is currently the best guidance for states and business owners to follow by the federal government in regards to cannabis. “Gaping holes in cannabis regulations are glaringly identified via the pesticide issues and recalls recently,” says Engelking. “These issues showcase each state being in violation of the Cole Memo’s expectation that they will implement strong and effective regulatory and enforcement systems that address the threat to public safety, public health, and other law enforcement interests.”
The Supreme Court’s denial of the two states’ challenge to Colorado’s cannabis legislation suggests the federal government’s intentional avoidance of involvement in current state cannabis issues. The government’s inaction does not, however, indicate their support.
With 2015 coming to a close, to understand and start strategizing for the next year, we must look back on the year and gauge the industry’s progress. A lot has happened this year and there is a lot to look forward to in 2016.
Nic Easley, founder and CEO of Comprehensive Cannabis Consulting (3C), gave a presentation at the High Times Business Summit last week, reviewing the cannabis industry’s progress in 2015, and providing some insights on what to look for in 2016. 3C is a national cannabis and hemp consulting firm dedicated to ensuring the highest standards in large-scale, sustainable organic production and product manufacturing. Over the past eight years in Colorado and nationwide, Easley has helped more than 60 clients design, build, start up, and optimize their operations. Easley is an active participant on multiple committees in various industries, non-profit groups, and rule making organizations that are setting the standards and regulations guiding this industry. Through his involvement he is able to promote sustainable, sensible practices and policies that drive cannabis cultivation and industry best practices into new realms of productivity, profitability, and professionalism.
We were able to sit down with Nic Easley after the conference to get some better insights for how the industry performed in 2015 and what is in store for 2016.
CannabisIndustryJournal: How do you think Colorado’s year of pesticide recalls will help shape the industry’s future?
Nic Easley: As a member of the Pesticide Advisory Committee with the Colorado Department of Agriculture, I think there is a tangible need for better, more comprehensive regulatory guidance. If we come out with strict pesticide regulations, it will be better for everyone in the industry and consumers, but more importantly it will benefit patients gaining access to safe, laboratory-tested medicine. The regulators will need our help to write the rules. Harder laws are good for us though, because the ethical businesses will always take the route of integrity, as opposed to the businesses that cut corners. Those companies not playing above board will be weeded out and reprimanded in due time. A lot of it comes with the responsibility as a grower and producer to facilitate medical needs, that is a responsibility that requires great integrity. As for the testing regulations, there are too many conflicts of interest and we need to look toward third party testing and accreditation to prevent laboratory shopping, skewed results and other inconsistencies. We need to not allow producers to provide their own samples, sampling and sample preparation needs to be controlled through third party laboratories working above board, as opposed to labs wanting to keep clients instead of providing accurate and consistent test results. Looking forward to 2016, we will continue to see the pesticide issue shape the industry, for better or worse, this is a problem we need to find the right solutions for and that comes through working with regulators, like the Colorado Marijuana Enforcement Division, to write the required regulatory framework.
CIJ: Looking nationally, what major trends were highlighted in 2015 and what would you like to see change for 2016?
Nic: With Oregon going online October 1st, and Maryland’s license application process opening up, we are recognizing some diminishing barriers to entry in markets previously difficult to tap due to things like residency requirements and where the capital came from. Maryland’s infused product and processing licenses are much more readily available as opposed to the cultivation licenses due to stipulations. States like Oregon and Alaska that dragged their feet a little with regard to their regulatory model, are just releasing a lot of barriers to entry for licensing applications. Oregon may have missed some tax revenue in the initial launch of the program, but they are doing it right through diligent research instead of using their citizens as guinea pigs. For businesses looking to get started, you can avoid poor decision making by knowing the rules. New and established businesses alike need to take the responsibility to write the rules to be socially, environmentally and economically responsible. If we want to make money in this industry to help the government’s role in keeping us safe, then doing business in the most socially responsible way possible will lead to profitability. What I would like to see change for 2016 is the expanding list of qualifying conditions. As a military veteran, I would like to see Colorado stop looking at the tax revenue of adult use cannabis, and make PTSD a qualifying condition for medical marijuana. The Bob Hoban lawsuit suggests that Colorado is marginalizing medicine because they will make more tax revenue by blurring the lines of adult use and medicine. All of the studies out there, including Dr. Sue Sisley’s work, suggests PTSD can be treated with medical marijuana. That highlights another trend I would like to see change in 2016: We need clinical research on these conditions, because observational research just is not credible enough. We [businesses in the industry] need to actively promote the need for clinical research to help propel social change and get the information and knowledge out there. With the right information, this industry can make informed decisions that will help all stakeholders.
CIJ: What advice can you offer to cannabis businesses for 2016?
Nic: I tell my clients that, because cannabis is still federally illegal, you must understand the present risk associated with the work you are doing. We need to ask questions like how can we do this responsibly and set a good example so when the time comes, the federal government will look to us as a legitimate industry, working with regulators to write the rules for safety. For new businesses, produce the safest, highest quality, and affordable medicine and work with other businesses and regulators to keep innovating in the area of safety. Focus on the structure of your business: build your foundations and using expert advice, you can avoid major pitfalls and become the leaders in this brand new industry. Look for environmentally sustainable solutions, climate change issues need to be addressed in this industry. Use appropriate technology instead of burning coal to grow marijuana, which increases our carbon footprint. This includes both environmentally sound standard operating procedures and the right technologies, but also social justice. We are presented with a terrific economic opportunity to work on climate change issues, so work to address inefficient practices and innovate to be as sustainable as possible.
CIJ: For the entire cannabis industry in 2016 , what kind of growth do you expect?
Nic: We have reached a point where I foresee a holding pattern beginning to take shape. In 2016, the industry will continue to grow and demand will not be satiated by supply. August of 2015 was the first month when Colorado saw over $100 million in sales. We will increasingly see more price fluctuations as bigger projects come online. Many states in 2016 will focus on problems with their regulatory models and devising solutions for them. Businesses will continue their strategic growth planning, with key states potentially coming online for adult use such as Nevada and California. Nevada is one of the most up and coming markets in America with a 68% approval rating, and they have the ability to grandfather in businesses and previous rules associated with their medical marijuana program. Knowing licensing applications can take eight to eighteen months before you can become operational, we have to place our bets wisely. There is a lot happening in all these states and from the big November votes on, chaos will ensue as regulators tackle big problems with the overhaul. In 2016, the cannabis industry will make a big impact on the United States, and the exciting part is that progress is made through business as usual for us.
G FarmaLabs, a family-owned and operated business, has been operating in California since November of 2013, when they launched at a Marijuana Business Conference in Seattle that year. Ata Gonzalez, founder of G FarmaBrands and chief executive officer of G FarmaLabs, has been in the cannabis industry since 2009, cultivating in California and operating marijuana dispensaries, when he took notice of the changing industry and consumer trends shifting toward consumption of edibles and concentrates.
“Once the Cole Memo hit in August of 2013, the cannabis industry took off and so did we through a combination of great timing and well thought out regular market packaging and marketing,” says Gonzalez. “With our background in cultivation, we use quality flower as the foundation of our brand, and our proprietary cannabis oil formulations are the backbone of the brand, we use that oil to infuse all regular market edibles products.” They are vertically integrated, beginning with their cultivation of seven strains, so they monitor every blend going into their products and test for potency and pesticides in a consistent manner.
Another key ingredient in their brand recognition seems to come through great product diversity. G FarmaLabs has twenty flavors of infused chocolate bars, a variety of chocolate truffles, pretzels, brittle, chocolate covered cherries, teas, lemonades and other forms of infused edibles. They manufacture a variety of cannabis oil concentrates that come in a syringe to refill cartridges or put on your dry flower or joint but they also sell pre-filled vape cartridges, and pre rolled cannabis cigarettes called G Stiks.
Luigi De Dominicis, chief technology officer of G FarmaBrands, says their extraction process is another essential factor in the brand’s success. They run their raw plant material through supercritical fluid extraction (SFE) with CO2. “We do not use solvents like butane to extract our oil because CO2 is proven to be safe for both the operator and end user; we pride ourselves in putting out a safe and quality product,” says De Dominicis. “The same product that goes into our cartridges and syringes goes into our edibles with a different refinement process, which are all tested for potency, microbials and pesticides to ensure consistency, safety and quality.”
In building a successful recreational brand, their expansion model will play a crucial role in keeping their reputation for quality and consistency. David Kotler, Esq., regulatory counsel for global territories at G FarmaBrands, cites their licensing model as the primary distinction between G FarmaBrands and other large marijuana brands looking to expand across state lines. “We are trying to own and control every operation and keep it consistent with production and manufacturing versus giving up control via the licensing process and giving it to others,” says Kotler. This distinction means that G FarmaLabs producers and processors in different states will all operate under the same best practices regardless of location, ensuring consistency from one state to the next.
“While most states have some form of residency requirements, we are planning to grow organically and self contained, ideally expanding to areas where G FarmaBrands can hold licenses,” adds Kotler. For example, Maryland does not have a residency requirement in their licensing application so that is one of the states they are actively pursuing.
Moving forward, G FarmaBrands is positioning itself for national recognition. “It is difficult in this current regulatory state to state structure to have a national brand, but national recognition is certainly attainable through our great in-house marketing team,” says Kotler.
Running an expansion model of keeping everything very internal, along with their dedication to safety and quality, G FarmaBrands is very well-positioned to be the premier cannabis brand for the state of California, and possibly the nation. They recently harvested a crop in Washington State and in 2016, their products will come to market there. As GFarmaBrands attempts to expand into Maryland for manufacturing, cultivating and operating a retail dispensary, Gonzales keeps his mind set on sustainable growth through 2016 and beyond.