Marijuana Business Magazine July 2020 by MJBiz Daily

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Insights for cannabis executives, investors & entrepreneurs

VOL 7 • ISSUE 6 • July 2020

RECESSION ROAD MAP How to steer your business through an economic downturn Work With Hemp Fiber Scale Up Your Extraction Facility Prepare for Federal Marijuana Legalization Develop Sporty Fans of Your CBD Brand

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July FEATURES

TABLEOFCONTENTS

Marijuana Business Magazine July 2020 • Volume 7 • Issue 6

34 RECESSION ROAD MAP How to steer your business through an economic downturn.

70 TOUGH FIBER

Entrepreneurs hoping to capitalize on hemp textiles in the United States face obstacles including a lack of processing equipment and a limited number of cultivars.

80 APPEALING TO AMATEURS

To reach active consumers, CBD companies build relationships, turn to pro stars and utilize social media.

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Insights for cannabis executives, investors & entrepreneurs

88 GETTING A HEAD START

Four tips to help marijuana companies prepare for federal legalization.

VOL 7 • ISSUE 6 • July 2020

On Our Cover

Choosing a path forward during a recession is never easy, but the road map in our cover package offers a good place to start.

Marijuana Business Magazine | July 2020

FIVE QUESTIONS WITH MICHAEL CAMMARATA

CEO of Neptune Wellness Solutions says paper towels—not pastilles—are the future of hemp.

PACKAGING CORNER

Technology allows consumers to look inside Can of Bliss’ packaging.

HEMP NOTEBOOK

Hemp entrepreneurs have lessons for all businesses facing an economic downturn.

BEST PRACTICES IN EXTRACTION

How to scale up an extraction facility.

104

QUESTION OF THE MONTH

How are retailers promoting concentrates for National Dab Day on July 10?

From the Editor

Trends & Hot Topics

DEPARTMENTS

Consumers have shown interest in textiles made of hemp fiber, but the machinery needed to make the products is scarce in the United States.

Company News

Industry Developments

Industry Players

106

Market at a Glance

110

Our Advertisers

112

CORRECTIONS

Notable Quotes

John Orloff, who was quoted in “Beyond the Vault,” a story that appeared in the May-June 2020 issue, is senior vice president of security risk management for Jensen Hughes. The article “Maximizing Extraction Yields” in the May-June issue incorrectly stated that Essential Extracts uses stems and leaves to create oil for cannabis extracts.

July 2020 | mjbizdaily.com

ContactUs | Whoʼs Behind This Magazine? Magazine feedback We are here to help the multibillion-dollar cannabis industry prosper. Let us know how we can serve you. Email us at m agazine@mjbizdaily.com with your thoughts, suggestions and any other feedback about the magazine and the stories we cover.

On the site To get the cannabis industry′s latest news and analysis, visit us at mjbizdaily.com and hempindustrydaily.com.

Find us on social media @MMJBusinessDaily @mjbizdaily @MJBizDaily

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To start/change/cancel your subscription, visit MJBizMagazine.com, call us at (720) 213-5992, ext. 1 or email us at CustomerService@MJBizDaily.com. Marijuana Business Magazine subscriptions are currently free to qualified U.S. cannabusiness professionals and investors age 21 and over only. To advertise with us, email Sales@MJBizDaily.com or call us at (720) 213-5992, ext. 2. Marijuana Business Magazine, Volume 7, lssue 6, July 2020 lSSN 2376-7375 (print); lSSN 2376-7391 (online) Marijuana Business Magazine is currently published 10 times per year by Marijuana Business Daily™, a division of Anne Holland Ventures Inc. POSTMASTER: Please send address changes to: Marijuana Business Daily, 3900 S. Wadsworth Blvd., Suite 100, Denver, CO 80235. Copyright 2011-2020 by Marijuana Business Daily, a division of Anne Holland Ventures lnc. All rights reserved. Materials may not be reproduced in whole or in part without written permission. For reprints of any article, please contact Customer Service.

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Marijuana Business Magazine | July 2020

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FromtheEditor | Kate Lavin

Forging a Path Forward T he collection of stories that starts on page 34 originated with one goal: Give companies the tools they need to survive this turbulent time. Staff writer Omar Sacirbey went above and beyond for this month’s cover package, speaking with cannabis business leaders across the country to find out how they are navigating the coronavirus-fueled economic downturn. To offer readers guidance, Sacirbey turned to four executives who have weathered previous recessions and distilled the lessons they learned—and how they are applying them in 2020. His story, “Lessons From Recessions Past” on page 54, is full of detailed, actionable advice about operating lean during a recession while making well-considered choices to keep a business profitable. Sacirbey also spoke with cannabis business owners from Florida to Michigan to California to devise a 16-point guide to surviving the recession. That story, “Getting in Fighting Shape” on page 38, is packed with advice about where to cut costs, how to deal with inventory, whether it’s appropriate to delay or continue expansion plans, how to renegotiate fixed debts and more. Reporter Bart Schaneman interviewed employment experts from the cannabis sector about staffing during a recession. Some of their advice, such as limiting overtime expenditures, is worth keeping in mind even when cash is flush. But other tips—such as assigning groups of employees to work together in shifts so that one ill colleague doesn’t infect the entire workforce—is specific to the ongoing coronavirus outbreak. Learn more in “Keeping a Lid on Labor Costs” on page 50.

Time to Restructure? Laura Drotleff, a magazine writer and reporter for Hemp Industry Daily, did a deep dive on legal bankruptcy options available to hemp companies. (See “Broke Enough for Bankruptcy?” on page 62.) Thanks to the 2018 U.S. Farm Bill, hemp companies can apply for federal bankruptcy protection when outstanding debts put businesses—and, in some cases, their principals—in legal jeopardy. Unfortunately, bankruptcy protection is not available to most plant-touching marijuana companies, but those business owners still have options. Michael Pankow and Jack Ucciferri from the law firm Brownstein Hyatt Farber Schreck lay out the ABCs (Assignments for the Benefit of Creditors) and other avenues available for marijuana firms in “Bypassing Bankruptcy” on page 52.

Marijuana Business Magazine | July 2020

Hemp Bedsheets and Planning for Legalization Even in an economic downturn, business opportunities exist and companies need to plan for the future. This magazine contains the first feature from new Hemp Industry Daily reporter Ivan Moreno, who spoke with business owners producing hemp textiles and learned what obstacles are keeping hemp fiber from being as easy to produce and profitable as hemp-derived cannabinoids. Finally, federal marijuana legalization might have taken a back seat to more pressing issues in recent months—but that doesn’t mean cannabis companies don’t need a plan for eventual reform. On page 88, government and regulatory issues reporter Jeff Smith outlines ways that marijuana businesses can be prepared for the day federal legalization occurs. As with many of your companies, operations at Marijuana Business Daily look much different than they did on Jan. 1. But our goal of providing you with the information you need to thrive is stronger than ever. Let us know how we are doing by emailing magazine@mjbizdaily.com. Sincerely,

Kate Lavin Marijuana Business Magazine Editor

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FiveQuestions | with Michael Cammarata

Walking an Unconventional Path CEO of Neptune Wellness Solutions says paper towels—not pastilles—are the future of hemp By Laura Drotleff

ow did a dyslexic 13-year-old who learned how to program computers, went on to manage a mainstream pop band and eventually build and sell a national deodorant brand come to lead a cannabis business? Michael Cammarata, the CEO of Neptune Wellness Solutions, a cannabinoid extractor and product manufacturer based in Laval, Quebec, with facilities in North Carolina, said everything in his life has been a series of chance events—so, not surprisingly, he named a venture capital and private equity firm he owns Random Occurrence. He’s learned a multitude of business lessons from working in technology, advertising, music and consumer packaged goods (CPG). But all of those lessons ultimately lead back to one underlying theme: “If you listen to the consumer, you’re going to be right.” Cammarata’s journey to the hemp space began in 2017, when he sold his deodorant company, Schmidt’s Naturals, to Unilever. He stayed on as CEO of the brand to expand the natural deodorant line into household goods for the global market until July 2019, when he left Unilever to join and invest in Neptune Wellness Solutions. Since then, he has led Neptune in somewhat unconventional deals, including trading shares for advertising with New York City-based media conglomerate American Media. Cammarata also gave $24 million in stock warrants to New York-based flavors and scents firm International Flavors & Fragrances to collaborate on a line of CBD and wellness products. In the months since the coronavirus pandemic shut down much of the economy, Neptune Wellness Solutions has kept moving, signing a brand-partnership deal with renowned wildlife ecologist Jane Goodall and gaining approval from the U.S. and Canadian governments to mass-produce hand sanitizer. Marijuana Business Magazine sat down with Cammarata to discuss what the cannabis industry can learn from the CPG industry, where he sees opportunities

Marijuana Business Magazine | July 2020

Wildlife biologist Jane Goodall and Neptune Wellness Solutions CEO Michael Cammarata inked a brand-partnership deal to develop plantbased hand sanitizers, essential oils and hemp-derived products under the existing Forest Remedies brand. It is expected to launch in the next few months. Courtesy Photo

for hemp and marijuana, and how the industry could recover from the coronavirus pandemic.

What motivated you to move from consumer packaged goods to cannabis, and how do you plan to apply your experience to the industry? The pivotal moment was looking at ingredients. At Unilever, I was looking at hemp because it has a very strong moisturizing effect on products … making natural deodorants and natural products more effective. Natural deodorants can last for up to 48 hours. But in a disinfectant wipe, it could get rid of a lot of the toxicity and chemicals if you replace them with (hemp’s) antifungal and antibacterial properties. The cannabis plant has so many different cannabinoids and flavonoids that can apply to the whole household. The fact that these powerful ingredients that are just now coming to the market really can transform everything you use and make them healthier, better, safer and more efficient—that’s exciting. Cannabis is going to get looked at on a whole different level once personal care, home care and beauty products on the CPG side start using it.

How do the partnerships you’ve built with International Flavors & Fragrances (IFF) and others contribute to your go-to-market strategy? We’re IFF’s only cannabis partner in the space. They have decades of expertise in extraction, working with flowers, and now with their merger with DuPont (Nutrition & Biosciences), we have access to 13,000 patents. They are the biggest ingredient provider in the world, so (the partnership) gave us access to their network and expertise. Looking at the market, there really hasn’t been a megabrand yet in hemp or CBD—or even cannabis, to be quite frank. So (with IFF), we started a group called Neptune Ventures to really be agile and launch two brands fast, in two months: Forest Remedies and Ocean Remedies. We want to offer product transparency, be affordable, offer value to the customer in innovation and partner with key retailers that traditionally don’t focus on hemp to really be accessible in the day-to-day lives of the consumer.

What do you think other cannabis companies are doing right and wrong in regard to consumer product goods? I don’t know who the hell came up with a pricing model for these companies because where did they think a stoner was going to get off the couch, walk to a dispensary (and) wait an hour in line to pay 50%-70% more than they’re (paying for marijuana) from their neighborhood friend? That is not a business model. There is zero innovation—and on top of that, they have pesticides in their products. The cannabis industry has to make a good leap in getting more efficient with their supply chain and overhead. Some of these bigger companies are spending billions of dollars when they haven’t even gotten sales results from the consumer, and they didn’t listen to the consumer when it came to product innovation. You’ve got to innovate; you’ve got to give them affordable pricing. It’s tricky because now, with consolidation, it’s going to be like a renaissance. There’s going to be strains that no one ever heard of, there’s going to be hemp products in your household—from toilet paper all the way to hand sanitizer. But now, we’re going to hear consumers say, “OK, guys, show us your innovations, and don’t rip us off.”

down based on demand; focus on innovation and get to eventually having organic biomass as soon as possible, because that is what the consumer wants in any product they have. They don’t want pesticides; they don’t want a whole bunch of chemicals. Monitor your supply chain. You don’t want to have a mistake like the Honest Co., where something was wrong and an ingredient cost that company a lot of money. You need to know your supply chain inside and out; you need to partner with people that make you more efficient, and you need to look at the IP that’s already on the market that you might not even be focused on.

How will the cannabis industry survive this public health crisis? What will be the lessons learned, and how can we adapt these lessons to help us rebound in the future? The lesson to learn is really looking at the extractors, looking at the supply chain, because there’s redundancy. The greatest thing about this whole (pandemic) is that cannabis has been deemed essential—mostly everywhere. That was a big movement for the cannabis industry. The second thing that we’ve seen is the supply chain is not prepared. I think cultivation is going to struggle the most, and people that didn’t have the right protocol for extraction and didn’t have the safety standards in place will have some issues. Ultimately, every company should have a plan. The biggest lesson that CEOs need is to drop down their egos, don’t try and cannibalize, and work together. The ones who collaborate and work together will benefit the consumer. The ones who try to do everything themselves will perish, no doubt about it. Some people think that they’re better than everybody else. I don’t know how that plays out, but I’ve always made a lot of money and been very successful by doing two things. One is focusing on the consumer and letting them decide what works and what doesn’t and listening to them. The second is collaborating with people, including competitors. Those are the two rules that everybody should look at because the answers are always around you, whether you’re listening to them or not. This interview has been edited for length and clarity.

How can cannabis companies build on that momentum from consumers? Don’t try to do everything yourself. Partner with people who can bring you innovation and bring you intellectual property (IP); don’t spend billions of dollars trying to create something that already exists. Scale up and

Laura Drotleff is a reporter for Hemp Industry Daily and Marijuana Business Magazine.

July 2020 | mjbizdaily.com

PackagingCorner | Margaret Jackson

Hemp Product Simulates X-Ray Vision Technology allows consumers to look inside Can of Bliss packaging

onsumers can see what’s inside the package even before they buy Can of Bliss hemp products. The company has developed a system that captures an image of the contents of each Can of Bliss so that consumers are able to scan the can’s unique QR code to see what’s inside. Consumers may also enter a can’s ID number on the company’s website to see the contents. “It gives it the illusion of X-ray vision; it looks like you’re looking straight through the can at its contents,” Can of Bliss CEO Johnna Calvillo said. Calvillo spent two years working with engineers in China and Europe on an app that integrates augmented reality and unique QR codes, the technology responsible for the packaging design behind Can of Bliss, which logged its first sale in 2017. The two-piece steel can has a pop top. A separate lid with a plastic gasket means no light or air can get inside the opaque can, making it ideal for storing hemp flower. Plus, it’s resealable, Calvillo said. What message are you trying to send with your packaging? “We want to empower people to be able to take this with them wherever they go and have it be well-protected, have it be portable and have it be beautiful,” Calvillo said. “We wanted to use the opportunity of this new industry to set higher standards of what packaging can do and how it can feel.” What problems did you encounter in the design process? Developing the child-resistant elements for Can of Bliss was challenging because of the can’s wide diameter.

10 Marijuana Business Magazine | July 2020

“If you think of the standard pill bottle, the diameter of the lid is narrower than our can, Calvillo said. “We had to make engineering adjustments to get the ‘push and turn’ to work on the diameter we’d already set. We wanted it to be a beautiful and functional experience.” What measures do you take to make your packaging sustainable? The steel can is recyclable in nearly every recycling program in the country. The lid is not recyclable because it’s made of mixed materials, but Calvillo is working on a program in which people who buy Can of Bliss keep the lids and purchase only the can. “The package itself is reusable forever,” she said. “It makes a really great carrying case for earrings when I’m traveling or rolling up my iPhone cords.” How much of the price of the products is spent on packaging? Can of Bliss packaging accounts for 3% or less of the total cost of the product.

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HempNotebook | Kristen Nichols

The Old Normal Why hemp entrepreneurs have lessons for all businesses facing an economic downturn

didn’t mean to start a joke, but my innocent question almost ruined everything. I was moderating a recent webinar featuring some titans of the hemp industry, entrepreneurs who have built multimillion-dollar companies in a tumultuous business sector that was arguably illegal when they started. While preparing for the webinar to go live, I asked the panelists how their banks are responding to loan requests to get through the current economic downturn. One business owner cackled. Another said he didn’t know what I was talking about, because he couldn’t get a bank to return his calls, even when the economy was strong. Pretty soon the whole gang was laughing so hard that when the event went live, the audience found a panel wiping away tears and short of breath. For me, the lessons were twofold. One, no one thinks I am funny when I am trying to be, only when

I ask a dumb question, which is probably how I ended up in journalism. And, two, the hemp industry was absolutely made for these rough economic times and can teach all businesses a thing or two about thriving during adversity.

Familiar Territory The business challenges faced by most mainstream companies right now are old hat for anyone working with hemp. Lenders ignoring phone calls? Check. Investors asking for unreasonable returns? Check. Governments vowing to help but then flubbing the execution? Check. Creditors demanding payment despite unforeseeable delays—as in a federal agency vowing to regulate a product and then forgetting about it? Check. (I’m looking at you, U.S. Food and Drug Administration.) Reading the business-page headlines these days, hemp pioneers

Hemp pioneers can be forgiven for guffawing at how large and esteemed industries have no idea how they’ll survive when faced with the kinds of challenges hemp entrepreneurs have been dealing with for decades.”

12 Marijuana Business Magazine | July 2020

can be forgiven for guffawing at how large and esteemed industries have no idea how they’ll survive when faced with the kinds of challenges hemp entrepreneurs have been dealing with for decades. Hemp pioneers built the current industry despite open hostility from both creditors and government. Now that hemp production is legal in the United States, many of those obstacles were supposed to disappear. But longtime operators don’t need to be reminded how to survive when obstacles remain. These latest challenges are just more of the same.

Secrets for Success The good news is that every hemp entrepreneur seems to love sharing what they’ve learned—both about the plant and about business. Many of their lessons can help entrepreneurs far beyond the cannabis industry. Messaging matters: Don’t enjoy rebutting naysayers? Too bad. If you believe in your product and your business plan, be prepared to explain it endlessly to skeptics. You don’t have to hire a slick PR firm, but you can’t throw up your hands or talk down to people who don’t get it. There’s no substitute for hard work: Maybe 10 separate lenders hung up on you. Pick that phone back up and call someone else; be ready to explain your business plan all over again.

Don’t plan for a rainy day. Assume it will always be raining: Make business plans that don’t rely on markets opening up or consumers having more to spend. Know your cash flow: This sounds insultingly basic, but a shocking number of small businesses and startups don’t have this number firmly in mind. A famous U.S. Bank study from 2017 concluded that 82% of failing businesses had cashflow issues. Hemp pioneers had no choice in the early days but to master cash flow without having a formal accounting department, setting them up for lasting success. Plan for delays: Back when growing hemp was legal only in certain states and under certain conditions, a group of companies sued the federal government to open market opportunities.

The companies lost. They’re still around—many bigger than before—because they kept their businesses going while pushing the government to change. Their work paved the way for many others to find success after Congress changed the law that limited the hemp industry. The entrepreneurs on that webinar I moderated weren’t trying to be mean when they laughed at my banking question. They’re just so resilient that even a global pandemic and market collapse didn’t make them question their industry. Any industry would be wise to follow hemp’s lead. Kristen Nichols is editor of Hemp Industry Daily. She can be reached at kristen.nichols@ hempindustrydaily.com.

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Trends & HotTopics | John Schroyer

Coronavirus Spotlights Marijuana Sector Double Standard

n a letter sent to U.S. President Donald Trump in mid-May, the chief executive of a large California marijuana company gave voice to a steadily growing sentiment within the cannabis industry. “We are a group of Americans who have full taxation but no real representation, as we are treated as second-class citizens,” wrote Kyle Kazan, the CEO of Glass House Group in Santa Barbara, California. Kazan’s letter focused primarily on the U.S. Small Business Administration and its position that state-legal marijuana companies are ineligible for financial relief during the coronavirus pandemic because the industry remains federally illegal. Kazan pleaded with Trump to allow companies such as his to apply for SBA loans so that law-abiding marijuana businesses would have the help they need to weather the pandemic. What the letter illustrated, however, is that the industry is also beginning to lose patience with government officials—both at the federal and state levels—who have been content to let marijuana businesses strive to remain operational under conditions any other mainstream trade would revolt against. It’s a double standard that the industry has lived with for years and

recently has been under the spotlight because every state with a functioning medical cannabis market has deemed those businesses “essential” during the pandemic.

as they go about their typical work routines. As of press time, Massachusetts’ payroll bill was still pending in committee.

A Cry for Help

‘Abused by the System’

Three-thousand miles east of Kazan’s office, Boston-based CommCan co-owner Ellen Rosenfeld testified to the Massachusetts Legislature in April on behalf of a bill that would fund a new paycheck-protection program for companies ineligible for federal coronavirus relief. In other words, a new fund to help cannabis companies through the pandemic. Rosenfeld told lawmakers that if the bill passed, her company would likely receive $400,000, which she thought would be fair given that CommCan paid more than $1.3 million in taxes and fees to federal, state and local governments in 2019 alone. “I cannot borrow money. I cannot issue more stock on the Canadian Securities Exchange. I cannot initiate another round of financing. I cannot get a bridge loan or an SBA loan. I cannot get a line of credit or borrow against any of my wholly owned facilities,” Rosenfeld said, arguing that a state loan would help protect her employees from the coronavirus

In Chicago, Cresco Labs CEO Charlie Bachtell said his company didn’t even bother applying for any state or federal aid because it wouldn’t be worth the time spent on the effort. “The (Congressional) aid packages were at least going to be as big of a lift if not bigger than tackling those other issues we’ve been historically working on,” said Bachtell, who also serves as chair of the National Cannabis Roundtable, which has been trying to persuade Congress to repeal Section 280E of the Internal Revenue Code and pass the SAFE Banking Act.

Gratitude for the ability to keep doing business through the pandemic hasn’t erased the double standard created by Congress’ inaction on marijuana reform.”

14 Marijuana Business Magazine | July 2020

Aaron Justis, the president of Los Angeles-based dispensary Buds & Roses, tried applying for CalCAP, a state-run lending program that’s aimed at helping small California businesses. He was told he didn’t qualify because none of the banks involved were willing to issue loans to federally illegal companies. “It’s like they’re going to extra lengths to not help us,” Justis said, noting that cannabis companies such as his have spent thousands of dollars to remain open during the pandemic, incurring costs that include installing new plexiglass to separate cashiers from customers, added labor hours, extra personal protective gear and so on. “We’ve been abused by the system for so long that they just think we’re used to it,” Justis said. “It’s discriminatory.”

Turning Gratitude Into Action This is not to suggest that many in the industry are not grateful for having been deemed “essential” by almost every state government that has an operational cannabis market (the sole exception being recreational MJ in Massachusetts). But gratitude for the ability to keep doing business through the pandemic hasn’t erased the double standard created by Congress’ inaction on marijuana reform—particularly when MJ industry workers are placing their lives on the line along with hospital staffers, grocery employees and others continuing to work through the pandemic. Bachtell, for his part, believes there’s a political opening that could be exploited, and the inclusion of the SAFE Banking Act in a proposed coronavirus-aid package in early

May is evidence he might be correct. Bachtell suggested that if the industry were suddenly granted banking access, it could spike from roughly 250,000 current employees to more than a million in two years or less. “Cannabis is putting itself in a position to be so logical and so rational as part of a comprehensive solution to the problems these governing bodies are going to have in a post-COVID world that the ability to say no (to federal MJ reforms) just doesn’t make any sense anymore,” Bachtell predicted. The entire industry should hope that he’s right. John Schroyer is a senior reporter covering California for Marijuana Business Magazine.

July 2020 | mjbizdaily.com 15

CompanyNews | U.S., Canada & International

U.S. DEVELOPMENTS

By Omar Sacirbey

Ethos Picks Up Seven Licenses from 4Front Ventures Multistate operator Ethos Cannabis of Pennsylvania reached a $22 million deal with a competing MSO from Arizona, 4Front Ventures, to purchase the rights to seven medical marijuana dispensaries in Maryland and Pennsylvania. Terms of the deal were not disclosed. Only five of the stores Ethos is acquiring are currently operating under 4Front’s brand of Mission dispensaries. They are located in Allentown, Pennsylvania, and the Maryland towns of Catonsville, Glenmont, Hampden and Rockville. The Pennsylvania acquisition comes with an option for Ethos to launch two additional dispensaries in the state, bringing to seven the number of dispensaries acquired. 4Front plans to use the proceeds to retire existing debt and focus on operations in California, Illinois, Massachusetts and Michigan. The acquisitions are pending approval from regulators in both states. All stores will be rebranded from 4Front’s Mission to Ethos Cannabis.

LivWell Buying Spree: Mindful and Sweet Grass Colorado-based LivWell Enlightened Health continued its acquisition spree with the purchase of competing retail chain Mindful, which owns five cannabis stores in the state. The acquisition of shops in Aurora, Berthoud, Colorado Springs and Denver expands LivWell’s footprint to 22 storefronts across Colorado. Financial terms of the acquisition were not disclosed.

16 Marijuana Business Magazine | July 2020

Recent deals, acquisitions and other announcements from cannabis companies

In April, LivWell acquired longtime Colorado edibles maker Sweet Grass Kitchen for an undisclosed sum. The company also purchased marijuana retailer Infinite Wellness Center in Fort Collins, Colorado, in 2019.

Acreage Nabs $15M High-Interest Loan, $60M Raise Multistate operator Acreage Holdings, which has been slashing overhead costs and selling unprofitable assets, secured a $15 million short-term loan with a whopping 60% yearly interest rate, the company said June 16. The secured note, obtained from a private investor, matures in four months, according to a news release. Acreage put up as collateral its marijuana business facilities in Florida, Illinois and New Jersey as well as its intellectual property. Under the terms of the loan, if Acreage were to default, it would owe the lender an additional $6 million. The loan follows an announcement that Acreage had agreements in place to raise up to $60 million, which would dilute existing shareholder stock. Since April, the company has enacted furloughs, scrapped a Nevada acquisition and sold its medical marijuana operation in North Dakota as well as undeveloped real estate in Massachusetts.

Greenbits Raises $23 Million San Jose, California-based cannabis technology firm Greenbits, which processes $3.7 billion in sales in more than 1,200 marijuana stores across the United States each year, raised $23 million in a financing round. Greenbits said it will use the Series B funding to: • Accelerate sales. • Fund marketing. • Develop products. • Expand into new markets. The financing for Greenbits was led by New Yorkbased investment firm Tiger Global Management and Los Angeles-headquartered Casa Verde Capital. Casa Verde also invested in Greenbits in 2017 and 2018. Existing investors and software industry executives also provided part of the $23 million, according to Greenbits.

CompanyNews | U.S., Canada & International San Diego REIT Does $17.5 Million Backyard Deal Innovative Industrial Properties (IIP), a real estate investment trust based in San Diego that specializes in sale-leaseback deals in the marijuana industry, spent $17.5 million to complete such a transaction near its Southern California headquarters. IIP bought a 70,000-square-foot facility and quickly signed a long-term lease with Kings Garden, a cannabis company based in the Coachella Valley. Kings Garden plans to use the facility to house a cannabis cultivation, manufacturing and distribution operation. This is the fifth leasing arrangement between IIP and Kings Garden. As of mid-May, IIP had invested roughly $740 million in marijuana-related properties, according to the company.

Omura Vape Company Raises $5 Million

CANADA DEVELOPMENTS

California-based Omura, a marijuana and hemp flower vaporizer company, raised $5 million, with a portion of the funding coming from Bruce Linton, former co-CEO and founder of Canada’s Canopy Growth Corp. The raise, while not major by cannabis industry standards, is significant during the global coronavirus pandemic, when investments are more difficult to secure. Linton, who will join Omura as a strategic adviser, most recently invested $1 million

in Minnesota-based multistate cannabis operator Vireo Health.

Denver MJ Company Rebrands Medicine Man Technologies, a Denver-based multistate cannabis operator, is now calling itself Schwazze, an offshoot of a marijuana pruning technique developed by the company. The name change and corporate rebranding is designed to differentiate the company and “marks the next stage of our strategic growth,” Shane Sampson, chief marketing officer, said in a news release announcing the move. Schwazze also completed its acquisition of Mesa Organics (aka MesaPur) and its Purplebee’s business. Mesa Organics operates four dispensaries in southern Colorado.

Boston Liquor Delivery Pioneers Enter Cannabis The entrepreneurs behind Boston-based Drizly, which specializes in delivering alcohol directly to consumers, are branching out into medical cannabis home deliveries through a new company called Lantern. The new service could give its MMJ retail partners an even bigger boost in sales, particularly during the coronavirus pandemic. The company will roll out deliveries beginning with medical cannabis patients in Boston before expanding throughout Massachusetts. The company hopes to eventually expand its delivery platform beyond Massachusetts into other marijuana markets.

pay $40 million of its common shares. The company will pay an additional $45 million (CA$61 million) in cash and stock if certain financial targets are met.

Ontario Producer Raises $33 Million

Aurora Breaks Into U.S. Market Canadian producer Aurora Cannabis struck a $40 million (CA$54.3 million) stock deal to purchase U.S. hemp firm Reliva, checking off a long-stated ambition of the Alberta company’s executives to enter the American market. Natick, Massachusetts-based Reliva sells hempderived CBD products in more than 20,000 retail stores. Under the terms of the acquisition, Aurora will

18 Marijuana Business Magazine | July 2020

Ontario-based cannabis grower Hexo Corp. announced the closing of an underwritten public offering worth $33 million (CA$46 million). The offering sold 59.8 million units, each of which included one common Hexo share and one common share purchase warrant that is exercisable within five years. Proceeds from the offering will be used “for working capital and other general corporate purposes,” according to a news release from Hexo.

CompanyNews | U.S., Canada & International Delta 9 Buys Two Alberta Retail Stores Delta 9 Cannabis in Winnipeg, Manitoba, closed a transaction to acquire Modern Leaf Group’s two retail cannabis stores in Calgary, Alberta, and Grande Prairie, Alberta. Delta 9 paid $960,000 (CA$1.3 million) for Modern Leaf’s assets, with $222,000 (CA$300,000) paid in cash and the remainder in Delta 9 common shares.

Aleafia Health Announces $13 Million Bought-Deal Offering of Units

INTERNATIONAL DEVELOPMENTS

Aleafia Health in Ontario entered an agreement with Toronto-based Eight Capital on behalf of a syndicate of underwriters to purchase 20 million units of the company on a bought-deal basis for gross proceeds of $9.6 million (CA$13 million). Each unit will be comprised of one common share in the company and one-half of one common share purchase warrant for a period of 36 months after the closing.

UK-Sundial Deal The United Kingdom’s Bridge Farm Group, which cultivates ornamental plants, flowers and herbs, announced that it was sold by its parent company, Alberta, Canada-based Sundial Growers, to an entity controlled by representatives of Artemis Growth Partners, an asset-management firm based in Costa Rica. The transaction was worth $75 million, according to a statement from Bridge Farm. As part of the deal, the buyers will assume $33 million of debt.

Australia and New Zealand Deal MediPharm Labs Australia agreed to supply a New Zealand company with white label medical cannabis oil products. Cannasouth of New Zealand will have exclusive

20 Marijuana Business Magazine | July 2020

If the underwriter exercises an option to purchase an additional 15% of the units, Aleafia could receive an additional $1.5 million (CA$2 million) in gross proceeds. The company intends to use proceeds of the offering for working capital and general corporate purposes.

Auxly Secures $25 Million Convertible Debt Auxly Cannabis Group in Toronto announced an agreement to sell unsecured convertible debentures of the company on a private-placement basis in the principal amount of up to $18.5 million (CA$25 million). The company intends to use net proceeds from the offering to build on the launch of Auxly’s Cannabis 2.0 products and for general corporate and working-capital purposes. Each convertible debenture will have a maturity date of 24 months from the date of issue and will bear guaranteed interest from the date of issue at 7.5% per annum, payable semiannually.

rights to the formulation and dosage forms set out in the two-year deal. Per the white label arrangement, MediPharm will supply the products with Cannasouth’s branding. Cannasouth recently raised $3.4 million (NZ$5.7 million) in fresh capital through the issue of roughly 15 million shares. MediPharm Labs Australia is a subsidiary of subsidiary of Barrie, Ontario-based MediPharm Labs Corp. New Zealand’s medical cannabis scheme commenced in April. But until the country’s domestic producers are licensed and fully operational, New Zealand will rely on imports to meet demand.

Materia Acquires Enters the German Market Materia, a multinational company focused on the European market, acquired 100% of the issued and outstanding shares of

Cannaktiv GmbH, a licensed importer and distributor of medical cannabis in Germany. Materia will rename Hamburg-based Cannaktiv to Materia Deutschland. Later this year, Materia Deutschland plans to import medical cannabis manufactured at Materiaâ&#x20AC;&#x2122;s facility in Malta, as well as a curated portfolio of products from other global supply partners. Materia said it remains on track to receive European Union-Good Manufacturing Practice certification for its manufacturing facility in Malta in the second half of 2020.

Blueberries Partners with QualCann to Export to U.S. Market Blueberries Medical Corp., a licensed Latin American producer of medicinal marijuana and cannabis-derived products,

announced it entered a joint venture with QualCann SAS to produce bulk CBD oil extract to be sold in the United States. QualCann is cultivating cannabis at its facility in Colombia, and dried cannabis flower will be transferred to Blueberriesâ&#x20AC;&#x2122; extraction center. QualCann will fund 100% of the agronomic operational costs of the 50-50 joint venture and market the product in the United States. Have a company announcement you want us to consider? Send a news release or general information to omars@mjbizdaily.com. (Note: Weâ&#x20AC;&#x2122;re looking for news about expansions, financing, deals, partnerships and similar developments, not product-related announcements.)

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IndustryDevelopments | International & State MAP LEGEND High level of medical development/implementation Medium level of medical development/implementation Low level of medical development/implementation Other - federally illegal but unique circumstances Recreational

Countries included have passed legislation at the federal level and must fulfill at least one of the following criteria: • Cultivation, manufacture or sale of medical and/or recreational cannabis allowed. • Doctors can prescribe medical cannabis. • Import and/or export of medical cannabis allowed. High: Countries at the forefront of the global industry. Frameworks are established, and adoption is well underway. Medium: Implementation has begun but is still limited or restricted; lots of room for the market to develop. Low: Legislation has been passed, but implementation is very limited or nonexistent. Decriminalization is not included.

National & International News Marijuana Sales Rocky Amid Pandemic More than 2½ months into the coronavirus pandemic, cannabis sales in five of the nation’s largest recreational markets are a mixed bag. Sharp sales increases in Oregon and Washington state suggest marijuana consumption is rising during the COVID-19 crisis. Oregon’s sales increases are especially notable, with May sales up nearly 60% from May 2019 and breaking the $100 million mark for the first time. While the gains in Washington state aren’t quite as dramatic, sales in March, April and May increased by an average of 28.5% over the same months a year ago. In California, Colorado and Nevada, however, the pandemic has been a drag on the adult-use cannabis market.

22 Marijuana Business Magazine | July 2020

Ontario’s ‘virtual inspections’ of cannabis stores keep industry growing Cannabis entrepreneurs are crediting the Alcohol and Gaming Commission of Ontario (AGCO) for its quick transition to a virtual inspection regime amid the coronavirus pandemic, saying the move has been key to increasing the number of legal stores in a province facing a serious retail shortage. The AGCO has conducted hundreds of virtual inspections since the province locked down for the pandemic in March—a pivotal time for the industry, as Ontario was starting to work its way through store applications. Typically, the process of licensing a store involves multiple in-person meetings and inspections. But instead of

hitting the brakes, the agency began conducting inspections using Apple’s FaceTime app. “It was a great switchover utilizing technology,” said Cameron Brown, spokesman for The Hunny Pot cannabis store in Toronto. “Without that, we would be months behind where we needed to be right now.”

Uruguay Sends Record-Breaking Shipment of Cannabis Flower to Europe Uruguay-based Fotmer Life Sciences exported almost 1.5 metric tons (3,307 pounds) of medical cannabis to Portugal in May, according to Uruguayan customs documents. The declared customs value of the shipment was about $2 per gram, including costs, insurance and freight.

The overseas shipment comes about six months after Fotmer sent 1 metric ton of high-THC cannabis flower to Portugal. The Uruguayan shipments could spur other European importers to follow suit, a move that would increasingly underscore the growth of the global medical cannabis industry. The two huge shipments, meanwhile, are unusual for their secretive nature—at least from the importer’s standpoint. Cannabis companies, particularly those from Canada, typically boast about the smallest of international shipments. But, so far, no company has publicly taken responsibility for importing the shipments from Uruguay to Europe.

July 2020 | mjbizdaily.com 23

IndustryDevelopments | International & State WA MT

MN ID

DE MD

TN AR

SC MS

RI PA

LA FL

■ Medical ■ Recreational HI

Note: This map does not include states that have legalized only CBD-based oils.

State News

Alaska The state implemented emergency rules allowing drive-thru and curbside pickup of marijuana products in a move expected to bolster public health and potentially sales during the coronavirus outbreak. Business owners who abide by certain rules also are being allowed to transport marijuana products by commercial plane or boat. The emergency regulations will run for 120 days unless modified.

Arizona Two former employees of Arizona-based Harvest Health & Recreation sued the multistate cannabis operator, alleging they were forced out of the company after alerting management the business had committed multiple violations of state law. According to the lawsuits, Harvest’s violations include improper inventory procedures, improper inventory storage, lying about testing and unlicensed growing practices. Both plaintiffs are requesting jury trials and punitive damages. Harvest denied any wrongdoing, a company spokesman wrote in an email to Marijuana Business Daily.

24 Marijuana Business Magazine | July 2020

Arkansas The Arkansas Medical Marijuana Commission awarded its sixth cultivation license to Carpenter Farms Medical Group on June 15 after accepting a settlement agreement that resolved a lawsuit. Carpenter Farms, a minority-owned company, alleged in its legal challenge that it was disqualified for typographical errors in its application and that the commission hadn’t similarly punished competing applications. Several lawmakers had argued that a sixth license was needed to bring down costs, noting that some MMJ patients are traveling across the border to Oklahoma to buy cheaper products.

California The Bureau of Cannabis Control and the California Department of Food and Agriculture (CDFA) disabled the licensing databases from their websites at the urging of industry members who had been robbed during protests over George Floyd’s death while in police custody in Minnesota. “In consideration of cannabis businesses experiencing increased burglaries over the past few days, the CDFA turned off the online license search function on the (agency’s) website until further notice,” spokeswoman Rebecca Foree confirmed in an email.

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IndustryDevelopments | International & State Colorado The state’s marijuana market took an 8% hit in April, despite the 4/20 holiday. Recreational sales in Colorado were down roughly 12% in April, clocking in at $112 million, while medical sales were actually up by 10%, at $36.5 million. The total monthly sales haul for the state’s marijuana industry was $148.5 million—a 7.8% drop from March, when sales hit $161 million.

Connecticut Lawmakers added chronic pain as a qualifying condition to use medical cannabis, a move that could significantly boost Connecticut’s growing, $100 million-plus market. Chronic pain, which Connecticut defines as pain that has lasted at least six months, generally is a leading sales driver for MMJ markets. The bipartisan legislative panel also agreed with a state Board of Physicians recommendation to add as a qualifying condition Ehlers-Danlos syndrome, which can cause pain in the joints or muscles.

Florida The state Supreme Court heard arguments on two issues that could significantly alter Florida's marijuana industry. One case is a longstanding issue of whether the vertically integrated structure of Florida’s medical marijuana industry violates the state constitution. If the Supreme Court agrees, Florida’s medical marijuana market would open up to stand-alone licensing opportunities. The other case deals with whether Make it Legal Florida’s recreational marijuana ballot proposal can go before voters. Decisions on the two cases are expected later this year.

Georgia The Georgia Access to Medical Cannabis Commission appointed Andrew Turnage as the program’s first executive director. Turnage has licensing experience as well as law enforcement experience. Turnage said in a statement that his goal is to ensure families in Georgia finally get low-THC oil, although he didn’t disclose a timetable for licensing or a sales launch. Six medical marijuana producer/processor licenses are available in Georgia, and pharmacies rather than independent dispensaries are expected to sell the products.

26 Marijuana Business Magazine | July 2020

Illinois Recreational cannabis sales in Illinois totaled $37.3 million in April as the state continued to experience strong activity even amid the first full month of a coronavirus-fueled, shelter-in-place order. April sales marked the second-highest monthly total for Illinois’ rec program since it launched Jan. 1. Adult-use sales in the state for the first four months totaled $147.2 million.

Iowa The state Legislature passed a medical cannabis bill that would increase the THC cap, which could boost sales in the heavily regulated, roughly $5 million-a-year market. The provision is a weaker version of a measure Gov. Kim Reynolds vetoed last year. Iowa currently allows medical marijuana products to contain up to 3% THC. The new measure would replace that with a per-patient limit of 4.5 grams of THC for a 90-day period. Certain individuals, such as terminally ill patients, could get more than 4.5 grams.

IndustryDevelopments | International & State Louisiana State lawmakers passed two medical cannabis expansion bills, but it’s uncertain whether the reforms will be enough to ensure the business viability of the small, heavily regulated program. The bills, which were signed by Gov. John Bel Edwards, will: • Do away with qualifying conditions and allow physicians to decide whether to recommend MMJ to patients. • Prohibit the state from discouraging or penalizing banks and credit unions from providing financial services to a state-legal cannabis-related business. Separately, state lawmakers passed legislation providing legal immunity to physicians who recommend medical marijuana.

Maine Marijuana businesses in Maine are suing the state to enforce a residency requirement for the adult-use market. Regulators dropped the four-year residency requirement in May, saying they didn’t believe they could win a legal challenge from the state’s largest medical cannabis company, Wellness Connection of Maine. Wellness Connection controls four of the state’s eight MMJ licenses and is affiliated with New York-based multistate marijuana operator Acreage Holdings. The lawsuit argues the Maine Office of Marijuana Policy had no legal authority to scrap a law without a court decision or state legislative action.

Maryland Cannabis sales in Maryland hit $252 million in 2019, up from $109 million in 2018. Through March 2020, medical marijuana sales in the state eclipsed $91 million, an increase of 86% from the first three months of 2019. Average per-patient sales in March 2020 were just shy of $350, the highest figure in the program’s history. Patient counts increased by nearly 34,000, or 55%, from March 2019 to March 2020. Currently, roughly 1.6% of Maryland’s population is registered in the state’s MMJ program.

Massachusetts Recreational marijuana stores in Massachusetts resumed sales on Memorial Day, ending a two-month closure that might have collectively cost those retailers nearly $2 million per day. Massachusetts was the only market with state-legal adult-use marijuana where those sales were not declared “essential” during the coronavirus pandemic; however, medical cannabis dispensaries were allowed to remain open. Adult-use stores that reopened May 25 reported strong consumer demand for preorders placed online or by phone to be fulfilled via curbside pickup. In other news, the Massachusetts Cannabis Control Commission plans to launch a statewide product catalog listing the various products manufacturers and retailers have to offer customers.

28 Marijuana Business Magazine | July 2020

Michigan The state is revamping its marijuana social equity program to draw more entrepreneurs impacted by the war on drugs to enter the industry. Any applicant with a marijuana-related felony will qualify for the program as long as the crime wasn’t for selling to a minor. Applicants with marijuana-related misdemeanors and those living in designated areas might be eligible for discounted application fees. To date, the program has awarded only two recreational marijuana business licenses—for an event organizer and a retailer—though 172 applicants have been deemed eligible for permits.

Minnesota Red Lake Nation citizens, an Ojibwe American Indian tribe in Minnesota, voted in favor of developing a medical marijuana program. Red Lake Nation News reported that 80% of the tribe said yes to a medical marijuana program that would allow the sale and use of medical cannabis flower, which the state of Minnesota prohibits. The state’s program permits only medical cannabis in liquid, pill or vaporized forms. Red Lake will also have a longer list of medical conditions to be eligible for a medical cannabis recommendation, including opioid-addiction recovery.

July 2020 | mjbizdaily.com 29

IndustryDevelopments | International & State Missouri State regulators approved BeLeaf Medical’s Sinse cultivation facility in St. Louis County to start growing medical marijuana, extending a sales launch into the fourth quarter of 2020. Missouri’s MMJ program initially was expected to launch in the spring but has been delayed by a number of factors, including the coronavirus pandemic. BeLeaf won three cultivation, two processing and five dispensary licenses. The state took in more than 2,200 applications for 192 dispensary, 60 cultivation and 86 processing licenses. Separately, a judge ruled that a lawsuit challenging Missouri’s medical cannabis licensing caps and scoring process can move toward a potential trial.

Montana A state group, rebuffed in its effort to collect digital signatures during the coronavirus for a recreational marijuana legalization campaign, planned to begin collecting signatures in person while following strict public health protocols. New Approach Montana hopes to collect the necessary 25,468 signatures by the July 17 deadline to place a commercial adult-use cannabis legalization proposal on the November ballot. Before the coronavirus outbreak, experts believed recreational marijuana legalization had a good chance to make the November ballot in Montana.

Nevada Approved recreational cannabis retailers in Nevada began conducting in-store sales May 9 while following physical-distancing guidelines as part of the governor’s plan to open the state amid the COVID-19 pandemic. Nevada regulators softened rules for marijuana stores as the coronavirus outbreak developed, at first allowing only delivery and then permitting curbside sales. Nevada’s marijuana retailers are required to limit the number of customers on premises to no more than 10, or 50% of allowed occupancy based on fire code, whichever is a smaller number. Both employees and customers must wear facemasks.

New Mexico The prospects for recreational cannabis legalization in New Mexico appear brighter after two key conservative Democratic state Senate leaders lost primary elections in early June. Senate President Mary Kay Papen and Senate Finance Committee leader John Arthur Smith were defeated by progressive candidates favored to win in the general elections in November. Papen has long expressed reluctance about legalizing recreational marijuana, and Smith’s committee was known for being a tough hurdle for legislation. Gov. Michelle Lujan Grisham is pushing for legalization as part of an effort to diversify the state’s economy and move away from traditional oil and gas.

30 Marijuana Business Magazine | July 2020

Ohio State regulators temporarily changed rules to give medical marijuana patients easier access to products during the coronavirus pandemic, allowing dispensaries to take phone orders, offer curbside pickup and sell MMJ to patients every 45 days rather than every 90 days. Transactions must take place on dispensary property. Additionally, Ohio regulators suggested adding cachexia, or wasting syndrome, to the list of conditions that qualify for medical marijuana recommendations. The board is expected to finalize its decision during a meeting in July.

Oklahoma The state’s growing medical cannabis market suffered a rare setback when Gov. Kevin Stitt vetoed a bill that would have allowed home delivery and pre-roll production and sales. The legislation would have allowed dispensaries to deliver within a 10-mile radius of their location. A number of states have allowed home delivery at least on a temporary basis during the coronavirus crisis.

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IndustryDevelopments | International & State Oregon A lawsuit against more than 200 Oregon marijuana companies is resulting in what looks to be a victory for the group of cannabis companies that refused to settle. The Racketeer Influenced and Corrupt Organizations (RICO) Act lawsuit, which alleged that smells from a neighboring marijuana processor diminished the “use and enjoyment” of the plaintiff’s property, was thrown out in May. The suit named 226 companies and principals who conducted business with marijuana processor Oregon Candy Farm. The court dismissed cannabis retailers from the suit, which cut the number of defendants in half. Some other defendants settled, with settlement amounts declining to $1,000 as the case progressed.

Utah The combination of patient demand and the coronavirus convinced Utah regulators to allow the state’s medical marijuana pharmacies to offer drivethru windows and home delivery for patients. At least two of the state’s three operational dispensaries planned to use drive-thru windows, according to local news outlets. Drive-thru service has become popular in many U.S. marijuana markets during the coronavirus pandemic, as retailers have looked for ways to maintain physical distancing while serving customers. The director of Utah’s MMJ program said three pharmacies won’t be sufficient to meet patient demand and indicated 11 more will open before the end of the year.

Washington state The coronavirus pandemic has made it impossible for Washington state lawmakers to conduct public hearings, so efforts to require pesticide testing for recreational marijuana have been tabled until further notice. Nearly all states with recreational cannabis programs require some form of pesticide testing. Washington state requires only cannabis allotted for the “medically compliant” program to be tested for pesticides. Under one proposal, pesticide tests would cost $70 and all cannabis would need to be tested, 4 grams at a time for 5-pound lots. Cannabis growers and processors in Washington state already pay a steep 37% excise tax as well as $120 per lab test for potency, microbials and mycotoxins.

West Virginia Medical marijuana companies in West Virginia, which has one of the slowestlaunching programs in the cannabis industry, will have to wait at least another year before beginning sales. Bill Crouch, cabinet secretary of the state’s Department of Health and Human Resources, told WVNews the agency is “looking at making the product available in the spring of 2021.” West Virginia passed medical cannabis legislation in April 2017, but bureaucratic holdups have mired the program in red tape. Reviews have been completed for applicants seeking business licenses to grow and process marijuana, though dispensaries are still under review.

Note: Entries sourced from Marijuana Business Daily, Hemp Industry Daily and other international, national and local news outlets. These developments occurred before this magazine’s publication deadline, so some situations may have changed.

32 Marijuana Business Magazine | July 2020

34 Marijuana Business Magazine | July 2020

By Omar Sacirbey

RECESSION ROAD MAP

How to steer your business through an economic downturn July 2020 | mjbizdaily.com 35

RECESSION ROAD MAP

A recession can be an existential threat to your cannabis company and an opportunity to emerge stronger. Guiding a business through a recession requires astute analysis of your company’s health and market challenges as well as a readiness to pivot. Keys to success include: • Executives need to routinely watch economic indicators such as credit-lending levels and bond-yield curves to spot economic troubles approaching. • Cost-cutting is imperative but should be done with extreme caution. Assets offering the most bang for the buck should be retained. • If your company’s balance sheet is healthy enough, a recession can be a good time to find high-value acquisitions. • Successful marketing in a recession means solidifying relations with existing customers and crafting messages that are relevant to the times and people’s situations. • Beyond layoffs, selling licenses and canceling expansion plans, other cost-cutting options include sharing licenses, renegotiating rents and invoice payments and taking advantage of lower input prices and bulk buying.

Vertosa, an Oakland, California-based company that makes and sells THC and CBD emulsions for infused product manufacturers, saves money by buying cannabis oils in bulk at deep discounts. Courtesy Photo

elcome to the modern-day marijuana industry’s first recession. Will the legal industry prove resilient, as alcohol has? Perhaps. (See chart on page 55.) But this downturn is unlike any other. The National Bureau of Economic Research pegged the start of the recession in February, triggered by the lockdowns and massive economic fallout caused by the coronavirus pandemic. Since then, the national economy has lost more than 40 million jobs. The unemployment rate hit 14.7% in April and remains high, even after May’s unexpected decline to 13.3%.

(See chart on page 51.) Unemployment numbers have not been this terrible since the Great Depression. In addition to the unemployment rate, other indicators point to widespread economic weakness. The Washington Post noted in June that nearly 50% of all commercial rents weren’t being paid. Also, the additional $600 a week in unemployment benefits being paid to millions of Americans is set to end in July, potentially triggering new rounds of defaults on credit cards, mortgages and other loans. Any resulting plunge in consumer demand could spawn other

36 Marijuana Business Magazine | July 2020

• Because of changing laws at the federal level, hemp companies have more debt relief and bankruptcy options than ever before.

delayed consequences and will be felt even further out—possibly for years. To be sure, far from everyone is forecasting doom and gloom. Economist Mark Zandi of Moody’s Analytics, pointing to a drop in May unemployment numbers, told CNBC the “COVID-19 recession is over,” although he expects a slow recovery until a coronavirus vaccine or therapy is widely adopted. The cannabis industry, for its part, has been living a tale of two recessions. Some companies are cutting jobs, selling assets and scrapping expansion plans to

U.S. RETAIL SALES IN 2020 (ADJUSTED FOR SEASONAL FACTORS) U.S. Retail Sales in 2020 (Adjusted for Seasonal Factors) $500,000

20% $464,062

16.79%

$461,914

$450,000

$446,918

$438,221

$400,000

16.79%

$382,654

15%

10%

Sales (Millions of US$)

5% $300,000

-0.46%

$250,000

$200,000

-5.13%

-5%

Percent Change from Prior Month

$350,000

$150,000 -10% $100,000 -12.68% -15%

$50,000

-20% January

February

March

April

May

Source: U.S. Department of Commerce Source: U.S. Department of Commerce 2020Marijuana Marijuana Business Daily, a division of Anne Holland Ventures Inc. All rights reserved. ©©2020 Business Daily, a division of Anne Holland Ventures Inc. All rights reserved.

Another casualty of the COVID-19 pandemic: retail sales. From March to April, sales dropped more than 15% as people found themselves out of work and/or under stay-at-home orders. U.S. online retail activity in April 2020 was double April 2019, according to data from COVID-19 Commerce Insight, but that boost wasn't enough to offset the drop in total retail sales. Overall sales rebounded in May but remained 6.1% below sales from a year ago. – Jenel Stelton-Holtmeier fix their balance sheets. Others are hiring and making acquisitions. Some executives predict convulsive change when the cannabis industry emerges from this recession. “I think you’ll start to see the emergence of five to seven large, well-capitalized players. I think there’s going to be a fair amount of blood on the streets,” said Erich Mauff, co-founder and president of Florida-based multistate operator Jushi Holdings. Others see the current environment as par for the course for the cannabis industry, in which tumult is the norm. “We have catastrophic change looming around the corner almost every day—whether it’s a new labeling

requirement or some prohibitive, draconian law that’s imposed on us,” said Ted Whitney, chief operating officer of Nug, a vertically integrated cannabis company in California. “The recession is just another one of those challenges.” (Nug suffered additional setbacks in June after it was targeted repeatedly by robbers amid nationwide protests against police violence.) Between the contradictions of doom and boom, it’s easy to feel lost. In this package, Marijuana Business Magazine has created a “recession road map” to help cannabis executives steer their companies through the chaos. Do you hunker down and cut costs

or take advantage of the opportunities created by the upheaval? The answer largely depends on your company’s niche, balance sheet and location—along with your ability to recognize excess and make cuts. To answer these and other questions, we’ve taken deep dives with cannabis executives into recession strategies and unearthed scores of tips, insights and advice. How long these uncertain times will last is, well, uncertain. What we can say is that the advice in the following pages won’t expire when the present recession ends but instead will remain relevant through this downturn and beyond.

July 2020 | mjbizdaily.com 37

RECESSION ROAD MAP

GETTING IN FIGHTING SHAPE Sixteen avenues cannabis executives take to cut costs, manage creditors and increase profit margins during a recession By Omar Sacirbey

ecessions are a time for cost control, but they can also herald opportunity—especially if your industry proves as resilient as cannabis appears to be in the current downturn. Deciding where to cut costs and/or where to invest in times of economic uncertainty requires research and careful consideration as well as the discipline to rein in expenses and eliminate waste. These times also demand the foresight and nimbleness to spot opportunities and move on them quickly. Identifying the right investments or costs to cut isn’t easy, so Marijuana Business Magazines gleaned insights from executives across the industry and summarized them here.

Assess what are essential costs and what are not.

Figuring out where to cut costs and where to invest requires a careful understanding and assessment of your business. In other words, what spending is least important and generates the lowest return, and what is most essential and produces the best payback, said Ted Whitney, CEO of Nug, a vertically integrated cannabis company in Alameda, California. “Going through that exercise, we were saying, ‘All right, so what are we willing

Vertosa saved money on rent by renegotiating its lease while keeping its lab. Courtesy Photo

to cut? What are we willing to not have?” Whitney said. “It really is communicating a lot around what’s critical.” “There were times when we said, ‘You know what? That’s a critical element that’s going to be part of a new item launch. I’ve already purchased $300,000 in packaging, so let’s make sure that goes to completion.’” Meanwhile, Nug stopped offering daily lunches for 200 employees. “It was significant,” Whitney said of the expense. “But things like that will come back.”

38 Marijuana Business Magazine | July 2020

Be ready to delay state expansion plans.

Some expansion plans are more promising than others, and executives need to be ready to part ways with the sexy for the solid. That’s what Florida-based Jushi Holdings, a seven-state cannabis company, did in May, when it canceled a deal to buy an undisclosed marijuana retailer in San Di-

ego for around $12 million. Instead, the company is focusing on expansion efforts in states it deems less saturated and more lucrative. The firm recently launched recreational sales in Illinois and medical sales in Pennsylvania, for example. “We’ve had to deemphasize in California,” Jushi co-founder and President Erich Mauff said, pointing to what he called “structural issues” such as taxes and saturation that aren’t going away anytime soon. “It’s just an optimization of investible dollars,” he added. “It’s just adjusting to the market environment to try and do things today that you wouldn’t have done four months ago because there was nothing to buy—or, if there was something to buy, the price was wrong.” That said, Jushi is not abandoning California—just delaying plans to open retail outlets there.

Lume Cannabis Co. in Michigan is following through with expansion plans. Courtesy Photo

Alternately, consider accelerating expansion plans.

While some expansions warrant delays, others might merit acceleration if the business is generating revenue and other circumstances are conducive. Take Lume Cannabis Co., a vertically integrated operation in Michigan, for example. Lume had eight stores open in the state in early June and hoped to have 20 by the end of the year. For the next four years, the company planned to open 20 stores every year for a total of 100 outlets after five years. Business has picked up enough during the first half of the year that the chain is accelerating construction on a 250,000-square-foot expansion to an existing 50,000-square-foot greenhouse. Or consider Vertosa, an Oakland, California-based company that makes and sells THC emulsions for infused product manufacturers in the state as well as hemp-derived CBD emulsions that are sold to clients nationwide. In May, Vertosa entered the Canadian market, where edibles were permitted in late

Doug Hellyar

2019, through a partnership with Vivo Cannabis, a Canadian license holder.

Consider sharing licenses through partnerships.

You don’t always have to unload a license to save money. Instead, bringing in a partner to share the costs of a license can be a good solution to keeping an asset you believe will pay off later. “That came into focus pretty rapidly,” said Whitney, noting that Nug delayed opening stores in the San Francisco Bay Area cities of Alameda, El Cerrito and Oakland and was seeking to “offload” other licenses. Nug was determined, however, to keep the Sundial Collective, a retail licensee in Redding, California.

But the only way to do that was to find a partner who could share the costs. In this case, the company split the license with the partner 50-50. Having the partner relieves some financial pressure—and, because the partner is local, it is better connected to the community and the market Nug seeks to serve. “Splitting a license with an operator has been a really successful way for us to get down the cost of opening up a new shop,” Whitney said.

Manage your workforce effectively.

Layoffs and furloughs are often inevitable in a recession. But for businesses in solid financial positions, recessions can be a good time to find top talent for good value. “There is a plentiful supply of very talented people that are available,” said Lume CEO Doug Hellyar, noting the company was in hiring mode to staff the dispensaries it planned to open throughout the year. Thanks to store openings in Illinois, Pennsylvania and Virginia, Jushi has been a “net adder” of jobs, Mauff said, but the business also has had to cut staff to stay efficient and free up capital for expansion.

July 2020 | mjbizdaily.com 39

RECESSION ROAD MAP The cuts have mainly involved general corporate and administrative positions. “That’s always where you want to get rid of people. We’re not as actively doing M&A, so we can get rid of some of those people,” Mauff said.

Don’t gut your marketing department.

Another department that often gets cut during economic downturns is marketing, although executives warned against doing away with your company’s communicators altogether: They provide a link to your business’ audience. “We trimmed our marketing spend a little bit on the channels that we thought were going to be quiet no matter what and conserved cash so we can turn it back on as the market comes back on,” said Kim Rael, CEO of Azuca, a Kim Rael multistate infused product company based in New York. The marketing efforts that took the biggest cuts were for CBD products in brick-and-mortar stores, Rael said. “We’ve downsized our marketing department, but we haven’t cut it outright,” Nug’s Whitney said. “It’s so critical that we’re communicating what we’re doing and we’ve got the bandwidth assigned for how we communicate to our customers.”

Retrain your existing employees to take over new responsibilities.

Laying off some people means those who remain must assume the work of those who’ve been let go. It’s up to company leaders to ensure the remaining employees are trained to pick up new types of work. “You also have to teach people to do new things in lieu of the jobs and skill

40 Marijuana Business Magazine | July 2020

The Lilliput Effect Paleontologists noticed that, after mass extinctions, smaller species are more likely to survive than larger species, which are more vulnerable to extinction. It’s called the Lilliput Effect. Could the same be true in business, specifically cannabis? “What I’m seeing is that a lot of small companies have been able to pivot and find ways to move their products, to adapt,” said Pam Marrone, a serial entrepreneur and CEO of Marrone Bio Innovations, a biopesticide and plant-wellness company in Davis, California, that has more than 100 cannabis customers. In fact, some multistate marijuana companies—including Acreage Holdings, MedMen Enterprises and 4Front Ventures—have had to drop acquisitions and lay off large portions of their workforce, many small businesses are thriving as they navigate obstacles. “Our business has almost doubled during this time,” said Linda Mercado Greene, co-founder and CEO of Anacostia Organics, a medical cannabis retailer in Washington DC. Despite the increase in business at her store, which was damaged during the George Floyd protests in June, Greene has doubled down on certain practices in response to the recession. For example, knowing that the recession could hit patients’ pocketbooks, she’s chosen to offer additional specials on some products on top of regular discounts. Similarly, Michael Domecq, co-founder and CEO of CaliHash, a Los Angeles craft hash manufacturer, said his company’s sales have ticked up during the economic downturn—and he attributes at least a part of that success to being a small business. “To be successful in marijuana today, create a lean and nimble enterprise, something that can move and morph and adapt quickly,” Domecq said. “Being a small company, I think we’re perfectly suited for this environment.” But the recession hasn’t been without hurdles for small businesses such as CaliHash. Domecq could no longer import from China the glass jars in which his company packaged its hash, so he turned to U.S. suppliers, raising packaging costs by 20% to 30%. Domecq grows revenue by getting new stores to buy his products. But an inability to meet with store owners during the pandemic has hurt that channel, Domecq said. The company had to lay off one employee, reducing its staff to five. And because it’s more difficult for small Michael Domecq businesses to capitalize on economies of scale, CaliHash has to execute quick decisions. “It’s not about demand. It’s about capital. We’re just short of capital,” Domecq said. While Domecq had been considering expanding his product line, the recession forced him to come up with a new product: a pre-roll that is 0.8 grams of flower plus 0.2 grams of hash. Citing figures from Colorado-based BDS Analytics, he said pre-rolls account for about 35% of all retail sales in California, so they were a logical path to recruiting more consumers. “By introducing a pre-roll product, you’re accessing a bigger part of the market,” Domecq said. “It’s difficult to pick up new shops, new accounts when you can’t do demos. … But what you can do is take the old clients with whom you have good relationships and introduce new products to them and expand revenue that way.” – Omar Sacirbey

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RECESSION ROAD MAP sets that have been lost. There are people from packaging who have never filled vape carts before,” Whitney said. “People who do it regularly can do 500 per hour, but the new ones are getting about 75 to 80 per hour. But with training, they can get close to 500 per hour. “Figuring out those gaps and how to make it easy on people has been a big challenge. We don’t want anyone beating their head against a brick wall all day,” Whitney continued. “You’re going to find ways to get them up to speed quickly and efficiently. So, being patient, offering the right training, offering support, offering encouragement, I think, are all very important things.”

Austin Stevenson

Renegotiate bills and contracts.

Another way to save money is renegotiating and delaying bill payments. For example, Vertosa roughly halved its rent by renegotiating its lease with the landlord. Specifically, the firm decided to keep the lab portion of the space that it rented but directed front-office staff to work from home, allowing the company to eliminate the office part of the space. “We had a really good landlord and said, ‘Hey, we only need half this space,’” noted Austin Stevenson, Vertosa’s chief innovation officer. The company also has taken advantage of a reduced-rate offering from its utility company, PG&E Corp. These cuts, in addition to a relatively small number of furloughs and layoffs (less than 10% of the overall workforce, Stevenson said), have helped the business cut 20%-30% of its costs. Nug also benefited from renegotiation “on all sides,” Whitney said. For example, although Nug is vertically integrated, it still needs to buy biomass wholesale from other cultivators for its concentrate production. One cultivator with whom Nug has a good wholesale relationship is essentially fronting biomass to the company for its concentrates and giving

Erich Mauff

Nug 30 days—sometimes 60 days—to pay for the biomass. “We’ve been able to get good credit terms. We can basically finance some of our buys. We’re able to move the material through, sell it and relay money back up to them,” Whitney said. “They’ve been really good about helping us out in terms of getting biomass on terms that work with our business model, and we get them pricing that works for theirs. So we might pay more than best deal, but it’s worth it for us because it’s not putting us into a cash-flow crunch.”

Leverage recessionary discounts into bulk buys and higher margins.

To create the emulsions that it sells to infused product companies, Vertosa

42 Marijuana Business Magazine | July 2020

buys cannabis oils and other extracts in bulk. Stevenson said that since well before the recession, there has been excess extract inventory on the market, resulting in lower extract prices. The recession has pressured those prices downward even more. And since concentrate can have a long shelf life relative to flower, Vertosa has been buying much more extract than usual but at deeper-than-usual discounts. The company is buying enough input inventory to sustain it for up to 12 months of production, Stevenson said. “We’ve been able to procure inputs at a lower cost, hold on to them and then, because of the lower costs, sell (our products) at a higher margin than when the cost of the inputs was higher,” Stevenson said. Vertosa also aims to lock in a preferred purchase-price rate for six to 12 months. So, if extract prices go back up, Vertosa has locked in the lower price. “What we commit to them is an order volume. And that helps us with continuity through the foreseeable future, or hopefully throughout the recessionary period before the market rebounds,” Stevenson said. Vertosa’s procurement manager keeps a running list of extractors in all of the company’s markets—California marijuana extractors and U.S. and international

hemp extractors—and watches their price lists on a monthly basis. If the procurement manager notices certain indicators moving—such as prices starting to erode on a monthover-month basis or increases in bulk-sales activities—that suggests prices are falling. “I subscribe to every single extractor we’ve worked with, plus others that we haven’t,” Stevenson said in May. “And I have seen in the past month or so what was a 10% discount has increased to a 20% discount, a 50% discount. And volume requirements to get those discounts has dropped.”

Create an inventorymanagement plan.

To maximize the efficiency of bulkdiscount buying, Stevenson said Vertosa creates inventory-management plans that are reviewed at least monthly and “aligned” with the company’s revenue and sales forecast. The first step is identifying the firm’s most core and loyal customers and reaching out to them to see what their production schedule is and what their input needs might be over the next 30 to 90 days. “No. 1: We ensure our current customer needs are met. We make sure to secure inventory for that pipeline of business first,” Stevenson said. Next, Vertosa looks at what new projects are being undertaken in the next 30 days to 12 months, then figures out how much inventory the company will need if it meets or exceeds sales rates; it then procures that amount. Finally, Vertosa tries to have enough inventory to conduct R&D as well as keep a buffer of inventory on hand. “I throw on an extra 20%, 30% buffer to have more than what we need while the prices are down so that we are sustained at a low price with a presumably increased profit margin because we’ve benefited from that price over the next 12 months,” Stevenson said.

Be aware that THC delivers more bang for the buck.

In recessionary times, businesses should focus on their most cash-efficient revenue streams and deemphasize those that are least efficient. Many cannabis companies are finding that THC products are more capital efficient than CBD products. Consider Azuca, which serves 12 states and sells THC products through licensees; it also sells hempderived CBD products online and in brick-and-mortar stores. “When COVID-19 hit us, we did an assessment of the business portfolio, and it was very clear that our most capital-efficient business is our licensing business in the THC world,” said Rael, the CEO. “So our pivot has been to double down with our THC partners and expand our THC license initiatives.” Jushi has also “deemphasized” hemp. “It was something we invested in when capital was accessible. When things get tight and you start looking at the returns that you can make in CBD from hemp … suddenly your investible dollar in (marijuana) can yield a much better return,” said Mauff, Jushi’s president.

Recessions offer opportunities to introduce cheaper products.

A recession can be a good time to roll out new products, particularly those that can be sold at lower price points. “We’ve definitely seen migration towards lower basket rings at the store. There’s been a total uptick in sales, but items that are on the shelf at a lower price are moving faster,” Nug’s Whitney said. Anticipating an economic slowdown late last year, Nug forged partnerships with outdoor and mixed-light cultivation companies, from which it buys “smalls”—slightly less potent cannabis flower taken from the lower and middle parts of the plant that are smaller than

flower picked from the top. Nug puts smalls in 0.6-gram pre-rolls and sells them as a value line called Erb. “We’re out there Ted Whitney buying smalls from different growers around California … and passing on that value to customers. So we’ve got a value-priced line, under the Erb brand, that has just come out,” Whitney said.

Dream up products by using inputs in new ways.

Control costs through partnerships.

Using inputs in fresh ways to create novel products is both an efficient use of assets and an opportunity to create new and even surprisingly lucrative revenue streams. “We have so many things we can flip around into something new just with a minor tweak,” Whitney said. For example, Nug noticed its customers like formulated, finished products that are ready to consume, such as pre-rolls. So the company began making pre-rolls infused with THCA—a potent, crystallized extract known as “Diamond Dust”—and THC isolate. “The pre-rolls have been very popular. They’re sold at a higher price point, which makes it easier to take lower margins on other products,” Whitney said.

In addition to offering pre-rolls with THCA, Nug introduced pills made with CBN powder. (CBN, or cannabinol, is a mildly psychoactive cannabinoid produced when THC oxidizes or decomposes.) Nug couldn’t have executed its pill plan without a pivotal partnership. While the company had the inputs, it didn’t have the machines needed to fill the pills.

July 2020 | mjbizdaily.com 43

RECESSION ROAD MAP 2020 Adult-Use Cannabis Sales by Week & Market:

ADULT-USE CANNABIS SALES WEEK MARKET: 2020 VS 2019 PercentBY Change Vs. & Same Week in 2019 California

Colorado

Nevada

Percent Change Vs. Same Week in 2019

120%

80%

107%

Wednesday, March 11: Day coronavirus becomes "real" for millions of Americans

100%

Week of April 13: IRS begins sending coronavirus stimulus checks

76% 56%

60% 40%

28%

20% 20% 17%

Washington

24% 19%

15%

6% -13%

-20%

-33% Week 22

Week 21

Week 20

Week 19

Week 18

Week 17

Week 16

Week 15

Week 14

Week 13

Week 12

Week 11

Week 10

Week 9

Week 8

Week 7

Week 6

Week 5

Week 4

Week 3

Week 2

-40%

Note:Week Week 2 begins Monday, January 2020. Each begins on on a Monday Note: 2 begins Monday, Jan. 6, 2020. Each6, week begins on aweek Monday and ends a Sunday. and ends on a Sunday. Source: Headset Source: Headset Copyright 2020Business Marjiuana division of Anne Holland Ventures Inc. All rights reserved. © 2020 Marijuana Daily,Business a division Daily, of AnneaHolland Ventures Inc. All rights reserved.

So Nug called nearby cannabis companies asking if anyone had a pillfilling machine. CannaCraft, a cannabis producer and manufacturer in Santa Rosa, California, agreed to make the pills and send them in bulk to Nug for packaging. But CannaCraft didn’t want to let a competitor use its machine for nothing, so the two companies explored ways Nug could help CannaCraft. As it turned out, both companies ran distribution trucks to Los Angeles and figured they could save money by doing it together. “We’re going to start sharing room on those trucks, and we’re finding new ways to collaborate in the retail space as well,” Whitney said, noting that the cost to use the machines comes out to pennies per pill.

Keep an eye out for real estate deals.

Recessions have often been good times to buy real estate, which is good news if you’re seeking a cultivation site or store-

Jennifer Drake

front. But don’t expect bargains on everything. “I’m able to secure better real estate because many restaurants and stores and bars and small businesses are not going to survive” the mandatory closures prompted by the coronavirus, Jushi’s Mauff said. He added that landlords resistant to cannabis businesses are likely to have a change of heart if their properties are sitting empty. But Hellyar from Lume cautioned that desirable real estate in high-traffic areas, such as those that his company is pursuing in Michigan, haven’t yet experienced price declines. “There’s really not a lot of softness in those prices,” Hellyar noted.

44 Marijuana Business Magazine | July 2020

Don’t wait to take these steps in bad times; make them habits in good times.

All the above tips can help a company against the ropes fight its way back. But the best strategy is to stay out of financial trouble in the first place: avoid overspending, curb costs, streamline operations, prioritize cashefficient efforts and jump on lucrative opportunities. “The key here for us as a business is the preparation you do beforehand, being a very disciplined allocator of capital—whether it’s a cultivation investment, an investment in technology or digital infrastructure,” said Jennifer Drake, chief operating officer at Ayr Strategies, a Massachusetts-based multistate operator. “Making sure that the things you do leading up to more difficult times is an important way to make sure that when you get some more of those more difficult times, you’re in a good position.”

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RECESSION ROAD MAP

RAISING MONEY IN A RECESSION Cannabis investment guru Sheri Orlowitz weighs in on funding when cash is tight By Jeff Smith

hen Marijuana Business Magazine spoke with Artemis Holdings Group founder Sheri Orlowitz a year ago (see “Raising Capital” in the July 2019 issue), a range of investors was keenly interested in the cannabis industry. Then came the double-whammy of the vaping crisis and the coronavirus-fueled stock market crash. Now, money is tight—especially for plant-touching companies. Artemis, a cannabis-focused venture capital firm in Washington DC, is still making direct investments up to $500,000 in early growth companies and making syndicate deals up to $50 million. In an interview with Marijuana Business Magazine, Orlowitz, a former federal prosecutor, offered a variety of tips for cannabis entrepreneurs keen to raise money in today’s recessionary environment. She also shared her thoughts on the current investment climate and what the future holds.

What has changed the most about the investment landscape during the COVID-19 pandemic? Valuations went down, and the risk profile is even greater. Equity will cost a company more; debt will cost more than pre-COVID-19. While the traditional cannabis funds say they are investing, in reality they are keeping their powder dry for their portfolio companies’ needs.

Could raising capital be even more difficult and costly a year from now?

Sheri Orlowitz

How do you view the investment opportunities for different sectors of the cannabis industry? I would separate them between vertically integrated or touching the plant versus the ancillary businesses. With regard to ancillary businesses, if there is a legal route to go—for example, you have a device that can be utilized for marijuana but can also be utilized for hemp, for either vaping or ingesting—then that might be very interesting for a fund that invests in medical devices. Hemp-ingredient companies should be interesting to venture capital/ private equity firms that focus on food, nutraceuticals and vitamins. There’s only one ingredient right now that is a problem, and that’s marijuana.

What would you advise marijuana companies trying to raise millions right now?

Avoid raising equity if you can because it’s very expensive right now.

46 Marijuana Business Magazine | July 2020

It could, and that’s a call the CEO needs to make. That’s a future-direction call. The companies looking for money obviously don’t have a long enough runway and probably didn’t raise enough in the first instance.

What is the elevator pitch that would impress you right now?

Top-notch management team that has executed on a similar-type opportunity in the past. Really good credentials: people, people, people. Traction. A clear pathway between growth and exit.

How concerned are you with the investment and economic climate right now?

I don’t think the SAFE Banking Act is going to pass the Senate this year. I think it’s going to be a very tight market. As I’m sure you’ve heard, potentially only the strong will survive: companies that are well-run, wellfinanced, well-connected and have a good product. Once upon a time, you could put seeds in the ground and the next thing you know, you have $1 million. Unfortunately, those days are gone. (This interview has been edited for length and clarity.)

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RECESSION ROAD MAP

BRANDING

IN HARD TIMES Cannabis companies should capitalize on their ‘essential’ designation and consider a brand makeover as well as cheaper product offerings By Omar Sacirbey

hen the economy nosedives and consumers slash their spending, a sage marketing strategy can help maintain existing customers, expand target audiences or even result in a complete makeover. “Now, more than ever, branding and being an authentic brand is so important,” said Olivia Mannix, president of Cannabrand, a marijuanafocused branding and marketing firm based in Denver.

Maintain Existing Customers

Because of the tough economic times exacerbated by stay-at-home orders across the United States, consumers are “seeking more personal connection, human interaction,” said Tye Heckler of Seattle-based Heckler Branding, whose mainstream clients include Starbucks, New Balance and Panera as well as cannabis companies such as Privateer subsidiaries Tilray and Marley Natural. “There’s a great opportunity to communicate and strengthen the personal bond with your existing customer base. Reach out to people on a personal level and remind them why the brand is important to them and why it should be part of their daily lives,” Heckler said. “Now is the time to nurture the relationship with who you already have a relationship with.”

Olivia Mannix

It’s also a good time to try new ways to reward your existing customers, whether it be with special offers or continuity programs. “A lot of it’s just to amplify the nature of your message that you’ve had already with your existing customers,” Heckler said.

Capitalize on ‘Essential’ Status

It’s also a good time to take advantage of the “essential” designation that cannabis

48 Marijuana Business Magazine | July 2020

has received in many states, according to experts. “I think it’s definitely an opportunity to try and reach people that have been hesitant to try cannabis,” Mannix said. The fact that so many state governments declared cannabis essential could be the incentive that pushes potential consumers into becoming existing consumers, Mannix explained. She added that many cannabis brands already are using the #essentialbusiness hashtag in their social media posts. Mannix also believes the essential designation is one reason Facebook, Instagram and other social media channels have cut back on hiding and deleting cannabis business pages. “I believe it has gotten less regulated than in the past,” Mannix said. “I haven’t heard about as many accounts getting shut down as before.” That’s important, she said, because when marketing budgets are tight, social media is an effective and inexpensive way to get your business’ name in front of the public, she said. “I cannot even express how important social media is for brands. It’s your voice,” she said. While Facebook and other social media platforms might have become less canna-phobic in recent months, marijuana businesses still must follow

basic guidelines to avoid being banned. According to Mannix, these include: • Ensuring your posts are more educational and informative than sales-related. • Never marketing to the younger-than-21 demographic. • Avoiding slang terms such as “weed.” Another way to take advantage of the essential designation, Heckler said, is to tell personal stories through customers—the veteran, the cancer patient, the stressed parent—about why cannabis is indispensable to them. “Give those individuals an opportunity to tell their story,” he said. “The common denominator is trying to find a personal connection.” He added: “It’s important to do something to acknowledge the fact that things are different right now. … If you don’t address anything, then you end up looking irrelevant, like you’re not involved,” Heckler said. “Then address the future. Give them some insights on what you’re planning to do … and what your goals are. Show that you’re not stagnant.” This could be done with short videos, newsletters and other ways your business communicates with customers. Mannix agreed. “It’s a really good time, if you haven’t already, to refresh your brand a little bit and just make sure your messaging is in line and current with the new times we’re in. Just showing your customers that you’re practicing safe guidelines.”

Consider a Brand Makeover

If you aren’t satisfied with your business’ name, logo or other brand attributes, a recession can be a good time to make a change. While changing names and other brand components sounds daunting, the longer you wait, the harder it gets, Heckler said. “It’s stepping back and saying, ‘What does our brand look like? Did we actually name our company in a fashion that’s going to help us long term to build a brand identity effectively?’” he said.

Recessions can be an optimal time to offer discounts or value product lines. Photo by Adam Amar

Tye Heckler

For example, consider your logo and design. Should the existing logo be tweaked or replaced entirely? A name change is also a great opportunity to talk about your business with your customers. “You have an excuse as a company to talk about yourself and why you’re awesome without sounding like you’re bragging. You have to tell them, ‘Hey, we’ve changed our name to X because of XYZ.’ This gives you a chance to reinforce your brand’s attributes and your values as a company and as a brand,” Heckler explained.

Weigh Discounts, Cheaper Products

Recessions are also opportunities, especially for premium brands, to offer discounts that they usually can’t

afford because of their premium status. It also may be a good time to roll out less expensive products that appeal to new customers without damaging your brand’s premium credentials. “There’re a lot of premium brands that are very sensitive to offering discounts. It’s just not part of their premium brand position. It’s kind of an opportunity to do it and get away with it without damaging the premium nature of the brand. People understand it’s just a different time,” Heckler explained. It’s also a good time—especially if you’re a premium cannabis brand—to consider coming out with a more broadly accessible and affordable product line. “It’s tailored to a broader audience. It’s more approachable from a price perspective. It’s good quality but not top tier. That’s a good offering to have to broaden your market and still keep the high brand equity, halo-quality position of the parent brand.” Not all companies have the capital to do this, Heckler warned, and if you can’t afford it, fall back on the strategy of strengthening your brand’s bonds with existing customers. “It’s a great time to do that stuff right now so that you can get yourself squared away and enhance your presentation in your marketing communications. And then, when things open back up, you’re positioned in a way that’s going to take advantage.”

July 2020 | mjbizdaily.com 49

RECESSION ROAD MAP

KEEPING A LID ON LABOR COSTS Employing a lean, productive team and limiting overtime can keep expenses from adding up By Bart Schaneman

abor is one of the biggest expenses in any cannabis business. Cannabis companies are hunting for ways to tighten their belts during the economic downturn, and executives are looking at personnel as one area where savings can be found. Businesses wanting to save money on labor costs might consider: • Running as lean of a team as possible by relying on versatile, productive workers. • Retaining the good talent they’ve worked hard to find and develop. • Keeping a lid on overtime and other excess payroll expenses. • Keeping employees healthy to avoid lost production. “These little bits of labor add up over time,” said Keegan Peterson, founder and CEO of Denver-based Würk, a company that provides payroll software and a human resource information platform.

Lean and Mean

Peterson advises cannabis retailers that want to save on labor to schedule the most productive employees to work shifts where they will have the biggest impact. For example, a salesperson who can upsell a client should work during the company’s busiest hours. Retail data shows that in some markets, cannabis consumers are

Employing versatile workers can cut down on labor costs. Photo by Mark Leffingwell

shopping less often but purchasing more each time they visit a store. A savvy business manager would put that high-performing sales associate on the floor when the most customers are visiting while encouraging that salesperson to steer consumers toward higher-value products. During tough economic times, Peterson said, “each person has to make a bigger impact across the organization.” The same thinking can be applied across the industry, including in cultivation and extraction operations.

Employee Retention

Losing good employees who require time and money to replace can be a significant

50 Marijuana Business Magazine | July 2020

drain on a company’s resources. At Portland, Oregon-based Chalice Farms, a vertically integrated cannabis company, John Ford, vice president of customer experience, is highly focused on retaining the business’ strong employees. “In the middle of this epidemic, you can’t afford to lose good talent,” Ford said. “We’ve worked very hard to make sure our teams are happy.” The company has made investments in its employees, including buying lunches, offering more cannabis samples and increasing how much paid time off they’re eligible to earn. Losing those employees with institutional knowledge and training “takes so much time to replace,” Ford added.

U.S. RATE IN 2020 U.S.UNEMPLOYMENT Unemployment Rate in 2020 14.7% 14%

13.3%

Unemployment Rate

12% 10% 8% 6% 4%

3.6%

4.4% 3.5%

2% 0% January

February

March

April

May

Source: U.S. Department of Labor © 2020 Business Daily, a division of Anne Holland Ventures Inc. All rights reserved. Source: U.S.Marijuana Department of Labor © 2020 Marijuana Business Daily, a division of Anne Holland Ventures Inc. All rights reserved.

At the peak of the COVID-19 pandemic, the U.S. unemployment rate spiked to a level not seen since World War II. Many of the new claims filed during March and April came from workers whose companies were forced to close because of public safety measures. Now, businesses are starting to reopen, and people are returning to jobs—bringing the unemployment rate down in May. Not all the jobs will still be there, however. According to a study from the National Bureau of Economic Research, more than 100,000 small businesses have permanently closed because of the pandemic. – Jenel Stelton-Holtmeier

Trim the Fat

Another way for cannabis companies to save cash is to get rid of “labor waste.” That means limiting the amount of overtime that’s paid. Paying an employee time-and-a-half can add up. “If someone doesn’t need to be in the office, then let them be at home,” Peterson said. Make sure employees aren’t clocking in or out of work late or early. Companies can set up software systems that allow employees to check in or out only according to a predetermined schedule. For example, if the worker is scheduled to come in at 8 a.m. and leave at 5 p.m.,

the system won’t allow that person to clock in a half-hour early or out a halfhour late.

Shift Control

Another way to prevent lost production time is to make sure everyone stays healthy and feels comfortable coming to work. A company that experiences a COVID-19 outbreak at work will have a major disruption to its operation in the form of lost revenue and workers who don’t feel safe. In response to safety concerns, managers at Full Spec, a Seattle-based

cannabis brand, are spacing out shifts for employees in the grow rooms by extending hours into the evenings and on weekends, said Marcus Naramore, director of business development. “We’ve created an environment where risk is minimized,” Naramore noted. Würk’s Peterson recommends grouping employees into pods that work together in staggered shifts, so if someone does get sick, the illness won’t spread to the entire workforce. “We’ve got to rethink how we’re deploying (our workers,)” he said. “You’ve got to keep your doors open for your business.”

July 2020 | mjbizdaily.com 51

RECESSION ROAD MAP

BYPASSING BANKRUPTCY Marijuana companies shut out from Chapter 11 protection have other options By Michael Pankow and Jack Ucciferri

arijuana companies have been relatively fortunate during the COVID-19 pandemic, with many deemed essential businesses able to keep their doors open. But with the nation’s economy facing a major downturn, some marijuana companies will probably have to restructure their operations after landing in financial hot water. Their options will be more limited than mainstream companies—but they will have options. Because Chapter 11 federal bankruptcy protection is unavailable to many cannabis-related businesses, owners and managers might have questions about how to legally restructure their operations. Here are answers to frequently asked questions.

Why can’t marijuana businesses file for bankruptcy?

Regardless of state law, marijuana remains federally illegal under the Controlled Substances Act. The federal prohibition extends to possession and other activities such as manufacturing or distribution. Bankruptcy courts are federal and will, of course, enforce federal law. As one bankruptcy judge stated, “A federal court cannot be asked to enforce the protections of the Bankruptcy Code in aid of a debtor whose activities constitute a continuing federal crime.”

Michael Pankow

Jack Ucciferri

Would my company be considered a marijuana business barred from bankruptcy?

• Handling the proceeds of marijuana transactions (considered money laundering). • Manufacturing or distributing equipment “having reasonable cause to believe” that it will be used to manufacture marijuana. • Maintaining a place for manufacturing or distributing of marijuana. As a result, marijuana-related equipment dealers and landlords have been found to violate the Controlled Substances Act and barred from bankruptcy relief. More broadly, it is a federal crime to knowingly and

That depends mainly on whether your company falls within a federally prohibited category and the importance of the prohibited activity to the business. Case precedents are developing, and the view of courts might vary to some extent. Businesses that “touch the plant,” such as growers, processors, distributors and retailers, likely will be barred from federal bankruptcy relief. Other potentially disqualifying activities include:

52 Marijuana Business Magazine | July 2020

intentionally aid and abet violations of the Controlled Substances Act.

Is bankruptcy available to my hemp/CBD/non-THC cannabinoid company?

Yes, probably. Under the 2018 Farm Bill, legal hemp and CBD are no longer prohibited by the Controlled Substances Act. (See "Broke Enough for Bankruptcy?" on page 62.)

Federal bankruptcy is probably not an option for me. So what are the alternatives? Chapter 11, while powerful, is not the only available tool short of shutdown and foreclosure. State laws and courts provide for receivership or assignment for the benefit of creditors. And a business and its creditors can always restructure out of court if they can agree on the terms.

assignor) transfers its entire balance sheet to another individual or business (the assignee). The assignee is empowered to sell or liquidate the assets in any commercially reasonable manner. Practice for an ABC varies by state. California, in particular, has a well-developed ABC statute that works much like quasi-state-administered bankruptcy.

What is a receivership, and how might it help my marijuana business?

What is the difference between a receivership and an ABC?

A state court-appointed receiver is a neutral party charged by the court to prudently administer the assets and liabilities of the business in question. Receivers are generally fiduciaries for the benefit of all constituents, not just the party seeking the receiver’s appointment. A receivership might stop pending foreclosures or litigation for a period of time or redirect those disputes into the receivership court. A receiver might be able to maintain operations and sell the business as a whole, or as a going concern, with the sale blessed by an order of the receivership court. This often results in a far better sale than simply shutting down and going through foreclosure.

What is an “assignment for the benefit of creditors (ABC)?” Assignments for the benefit of creditors are provided in many states as an alternative to federal bankruptcy. In an ABC, a distressed business (the

Both processes typically lead to a sale of the business’ assets. An ABC can have little court involvement and, thus, can be simpler and less expensive. In addition, the identity of the assignee is typically selected by the secured lenders with consent from the company. A receiver is appointed by the court, often but not always a person suggested by the parties. A receiver is often in a better position to operate the business pending a sale. A receivership is typically better suited when there is litigation for the receiver to manage or other complexity requiring court involvement.

Can I try to restructure my debt and keep the business without Chapter 11?

ABCs and receiverships typically end with sales, but nothing stops a business from seeking an out-of-court restructuring outside the Chapter 11 process. In fact, many non-cannabis businesses restructure without Chapter 11.

A business unable to use Chapter 11 does lose powerful tools, including the ability to keep control as a “debtor in possession” while it tries to negotiate a plan. Unavailability of Chapter 11’s “cramdown” power, which can force changes to secured and unsecured debt—such as extension of maturity or reduction in amount—might affect negotiating dynamics. But parties might recognize that the business is worth more to stakeholders by being reorganized instead of sold. Difficulties involved in the sale of a business (including market conditions or licensing requirements) might leave restructuring as the most attractive option.

How can I achieve the best outcome for my marijuanarelated business?

Outline and examine your options with a lens of how they align with your goals. Retaining an attorney and other professionals experienced in turnarounds can help tremendously, especially when it comes to understanding potential routes to take and the ramifications of each option. Remember that some level of creditor and stakeholder consensus will be required, and success is more likely if you lead your constituents with effective communication and action. Michael Pankow is an attorney for Brownstein Hyatt Farber Schreck who specializes in business reorganizations and debtor-creditor relations. Jack Ucciferri is a law clerk for the firm.

July 2020 | mjbizdaily.com 53

RECESSION ROAD MAP

LESSONS FROM RECESSIONS PAST Executives who have lived through previous downturns share their thoughts on how to keep businesses afloat By Omar Sacirbey

hen the Great Recession hit in late 2007, the marijuana industry showed little resemblance to what it is today, with only a few cannabis businesses operating now that were open then. Today, thousands of growers, retailers, manufacturers and ancillary companies operate across more than 30 states—and they now confront a major economic downturn.

For many in the cannabis industry, this might be the first recession they’ve faced as an executive—or even as a professional. Steering a company or business unit through any recession is daunting, especially one of this magnitude. Nevertheless, past recessions can offer lessons for how to cope. To that end, Marijuana Business Magazine assembled a quartet of cannabis

54 Marijuana Business Magazine | July 2020

executives who have weathered the nation’s past three recessions: • The savings and loan crisis of 1990-91. • The dot-com bust of 2001. • The subprime mortgage debacle of 2007-09. In the following pages, these four executives share lessons they learned from previous recessions and how they are applying them to the current downturn.

BEER, WINE AND LIQUOR WHOLESALE Beer, Wine and Liquor WholesaleSALES: Sales:2006-2012 2006-2012

U.S. Wholesale Sales (millions) U.S. Wholesale Sales (millions)

$30,000 Beer, Wine and Liquor Wholesale Sales: 2006-2012 $30,000 $25,000

$25,000 $20,000

$20,000 $15,000

$15,000 $10,000

$10,000 $5,000 $0 $5,000

GreatRecession: Recession: Great Dec. 2007 2007 --June 2009 Dec. June 20..

4Q06 2Q07

4Q07 Great 2Q08 4Q08 2Q09 Recession: Dec. 2007 - June 20..

Source: U.S. Source: U.S. Census Bureau $0 Census Bureau © 2020 Marijuana Business Daily, aBusiness division of Anne Daily, Holland Ventures Inc. All rights © 2020 Marijuana a division ofreserved. Anne 4Q06 2Q07

4Q07

2Q08

4Q08

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

4Q11

2Q12

4Q12

The coronavirus-fueled recession of 2020 is the first significant economic downturn experienced by the legal cannabis Source: U.S. Census Bureau industry, it remains to be seen segment is "recession-proof"—a oftenreserved. applied to the alcohol industry © 2020 so Marijuana Business Daily,ifathe division of Anne Holland Ventures Inc.term All rights because sales of beer, wine and liquor tend to remain relatively stable—even in tough economic times. For example, during the Great Recession of 2007-2009, wholesale sales of alcohol generally stayed above the overall trend line for such sales. – Jenel Stelton-Holtmeier

PAM MARRONE

Founder and CEO, Marrone Bio Innovations, Davis, California As head of Monsanto’s Insect Biology Group in the 1980s, Marrone pioneered the field of biopesticides and leveraged that experience to become a serial entrepreneur. Lessons she’s learned from the past three recessions include: • Raise more money than you need during good times and don’t worry about dilution. • Investors who have lived through recessions will better understand your challenges than those who haven’t. • Executives and managers need to take salary reductions. • Balance cuts and growth opportunities.

Marrone started her own biopesticide company, Entotech, in early 1990 under parent Novo-Nordisk. A few months later, the nation fell into a recession, but Entotech was unaffected because food prices remained high and farmers kept buying its products. Averting disaster wasn’t so easy in 2001, when Marrone was CEO of AgraQuest, a biopesticide company later acquired by Bayer for nearly $500 million. “A Silicon Valley investor in AgraQuest said, ‘Plan for disaster. You just don’t know what’ll happen,’” Marrone remembered. She was left to wondering, “What’s going to happen?”

July 2020 | mjbizdaily.com 55

RECESSION ROAD MAP What happened was 9/11, just a few days after Marrone landed in New York City for the start of AgraQuest’s IPO roadshow.

Marijuana executives can learn from past recessions to guide their companies through the present one. Photo by Adam Amar

Raise Money in Good Times, Dilution Be Damned

Consequently, Marrone, who built the company in anticipation of $50 million in proceeds, couldn’t close the offering and had to quickly cut costs. Simultaneously, venture capital markets “slammed shut,” forcing AgraQuest to compete with dozens of other companies for capital. “You’re at the mercy of those giving you the money, and then you don’t get the best terms,” Marrone said. “In the good times, you want to raise more money than you need and not worry about dilution because you need it to weather.” But raising money is often easier said than done—especially if investors are worried about dilution. Winning those battles is likelier if investors have been through a recession. “Money coming from those who have gone through tough times and who’ve built businesses is often more forgiving than from those who have never been through it,” Marrone said.

Balancing Cuts and Growth

Experienced investors also are more likely to understand that abandoning future growth opportunities can be imprudent. For example, after 9/11, some AgraQuest board members wanted to forgo European expansion plans. Marrone argued they were at the “cusp” of European revenues and pulling back would be “penny-wise and pound-foolish.” “You don’t want to cut the longterm prospects of the company. But, on the other hand, you have to live to see another day,” she said. “It’s a really difficult balance.” To convince resistant board members about pursuing revenue in Europe, Marrone reminded them that

venture capital stakeholders in the company would need an exit at some point. As it turned out, the AgraQuest product Serenade became a leading biofungicide that later netted the company millions of dollars in revenue. Marrone made cuts after 9/11, too. For example, she significantly reduced the marketing department and resorted to marketing “on the cheap.” She also asked AgraQuest’s upper-management team to take 10% pay cuts, although they all refused except for the chief financial officer.

Lessons Applied in 2007 and 2020

As CEO of Marrone Bio Innovations, which she founded in 2006, Marrone has applied the lessons she learned from previous downturns. For example, she raised money during good times, including a Series A round in 2007, just before the market collapsed. “I would have gotten much worse terms—and maybe not even been able to raise” later—plus a 2013 IPO followed by several funding rounds. Marrone is still selective about where she chooses to cut expenses. While many companies cut research and development budgets during recessions, she said only about 20% of her R&D budget goes to new product development while the

56 Marijuana Business Magazine | July 2020

rest goes to mandatory product safety, quality and manufacturing support. She also credits the R&D team for improving Marrone Bio’s operating efficiencies and taking the company from negative margins to margins of 58% since 2015. “You have to look at what is essential and what is going to generate near-term cash from sales at a good margin,” she said. “What are you going to reduce without harming future growth? Because investors—this is in cannabis as well—they want to see a big, highgrowth company.” In response to board demands, Marrone cut 10% of her company’s budget. She did this by reducing senior executives’ salaries by 10% and replacing the difference with restricted stock units (RSUs). Bonuses for the top two management tiers—typically paid half in cash and half in RSUs—were paid all in RSUs, while pay increases were frozen throughout the company. Marrone is better positioned than in recessions past, but she’s still concerned because commodity prices are down and farm bankruptcies are up, although she said sales to cannabis clients remain steady. “You just in general have to plan for disaster, which means raise money when you don’t need it,” Marrone said. “Get as much as you can.”

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RECESSION ROAD MAP ED SCHMULTS

CEO, Calyx Peak, Foxborough, Massachusetts This is Ed Schmults’ fourth recession, and while it might be more staggering than the previous three, thus far it has been the easiest to weather. Why? Because cannabis has so far proved to be recession-resistant, while products from his previous businesses were not. Still, lessons from those earlier struggles inform Schmults’ decisionmaking today. For example: • Inspire confidence in employees and firmly set company direction. • Have a plan for moving inventory and streamline operations. • Capital is critical to moving forward.

“You have to get out from under your inventory burden and you have to reduce costs, which sadly involved layoffs,” he said. “I think the one lesson is always do more than you think you need. If you do it piecemeal, it’s just brutal for everybody involved.” Another step is looking at supply relationships and bidding out costly contracts to make sure you get the best value. “When business is good, you don’t address a lot of those important, day-in, day-out aspects,” he said. At FAO Schwarz, that meant assessing which vendors were making the most money per square foot of the store and whether the company’s transaction technology was the best fit for the company’s needs.

Decisive Leadership

Consider Patagonia, the outdoor clothing retailer where Schmults was a business analyst when recession hit in 1990. “Our planning had expected rosy season after season, and all of the sudden, it flattened out. The company just hit a wall,” Schmults recalled. “We didn’t see it coming, and the company was unprepared for it.” Patagonia’s bank at the time, Security Pacific (which was bought by Bank of America in 1992), pulled Patagonia’s credit line. About 30% of Patagonia’s employees were laid off—including the entire C-suite team. The company ushered Kristine McDivitt, a previous CEO who was still with the retailer but in a different executive post, back into the chief executive’s office, where she rallied the remaining staff. “I’ll never forget the first meeting,” Schmults said, recalling how McDivitt called about eight leaders into a conference room “and just gave this unbelievable, inspiring speech … went around and said, ‘I want you to do this, and I want you to do this.’” The lesson for executives: “You set the direction,” Schmults said. “If she told

me, ‘Jump out that window.’ Boom, I was gone.” “There’s the old adage, ‘don’t waste a crisis.’ The opportunity to rethink how to conduct business more effectively resulted in a healthier company coming out the other side,” Schmults said.

Improving Operations

Schmults emphasizes that while the human toll recessions take are never a good thing, downturns do offer opportunity for improvement. In 2007, he was in a similar situation as CEO of the iconic toy store FAO Schwarz when the subprime mortgage crisis occurred. “I can point to the day: Oct. 30, our sales just fell off a cliff. I was also on the board of REI at that time, and the same thing happened to them. Those financial executives were our core customer, and they just got crushed,” Schmults recalled. “We suspected that the business was going to get tougher but not quite so abruptly.” Nearly two decades later, Schmults had to do what his leaders at Patagonia had done, but in a much more difficult downturn.

58 Marijuana Business Magazine | July 2020

Capital Critical

Schmults was confident enough in his measures and the resulting plan that he offered to buy FAO Schwarz from its investors, whom he said eagerly accepted the idea. But after speaking with more than 50 investor groups, Schmults couldn’t raise enough money to buy the store. “Nobody was investing in anything—it’s kind of similar to now,” he said. While cannabis is performing better than toys and apparel, the current downturn has Schmults thinking about those earlier lessons. “You’ve got to think about landlords, about your customers. Do they have jobs? Are they going to be cutting back? This may not hit cannabis until June or July—or manifest itself in a very different way.” And even if sales stay solid, investor capital has dried up, Schmults said. “All of our expansion plans require capital,” Schmults said. “In terms of maintaining the ship, continuing sales will do it. But in terms of expansion plans … you can’t do that just with sales. You need investors, you need capital.”

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RECESSION ROAD MAP AL FOREMAN

Managing Partner and Chief Investment Officer, Tuatara Capital, New York City Al Foreman was taking business and finance classes at the University of Connecticut during the 1990-91 recession. For Foreman, the downturn drove home his professors’ lessons about recessions being cyclical and watching certain economic indicators to gauge if a downturn is looming.

“Banks trying to syndicate leveraged loans were not able to find buyers on the other side. It was July 2007, and that was the first indication there was a credit crunch. That credit crunch was a year in advance of the actual recession setting in,” Foreman recalled.

2020 Applications

Cycles and Indicators

“Recessions are not only cyclical, they’re often predictable by patterns shown several years in advance,” Foreman said. “The lesson learned is try to identify where you are in the cycle, because it may impact the investment you’re making or a particular business decision that you’re evaluating.” Among the key indicators to watch are: • Upturns in credit borrowing that signal a lending crunch. • Short-term bond yields are higher than long-term bond yields. • Lenient federal banking and finance policies. “The past couple of years, we’ve seen increased borrowing on both the personal and corporate sides, which is an indicator that there might be choppier times ahead as more people get overextended,” Foreman said. He also noted that in recent years, the Federal Reserve has lowered reserve ratios (the amount of cash banks are required to keep on hand and not loan), which has allowed financial institutions to make more loans while also weakening their balance sheets. As for inverted yield curves—when short-term bond yields become higher than long-term bond yields—Foreman said: “Pretty consistently, 12 to 18 months after you see the treasury yield curve invert, you find yourself in a recessionary climate.”

Risk, Company Performance, Credit Crunch

In 2000, Foreman left a well-paying vice president-level job at Citigroup Private Bank to become senior business development manager at Virtual Growth, a startup financial services software company. “Great concept, wrong timing,” he said of the company. Soon after Foreman started, the tech bubble burst and he was laid off. But Foreman calls that year at Virtual Growth one of the most educational times in his professional career. Watching the company fail to meet its business objectives and not secure financing helped shape how Foreman approaches investing today—particularly, making sure Tuatara’s portfolio companies have a strong enough corporate structure and balance sheet to move forward. When the Great Recession hit in late 2007, Foreman was back in finance, this time as a managing director in J.P. Morgan’s financial sponsors group. In the months preceding the downturn, economic forecasters detected signs of a credit crunch.

60 Marijuana Business Magazine | July 2020

Foreman’s experience at J.P. Morgan still informs how he makes decisions today. “Having had the opportunity to see how one of the premier banks in the world manages its overall portfolio … when dealing with challenging economic times” has served as a handbook for how Foreman is advising the companies in Tuatara’s portfolio. Foreman estimated that most leaders at Tuatara’s portfolio companies have operated businesses or business units during recessions, but most haven’t experienced them as executives. “This is going to be a challenging time for the cannabis industry because last year was its first credit crunch, and this year’s recession will be the first time the industry in a formal fashion has really had to navigate through a recessionary period,” he said. Foreman also saw signs that yield curves would invert last summer, prompting Tuatara to take “a more bearish view” and expect a recession. With that knowledge, Foreman said he and his partners called meetings with portfolio and prospective pipeline companies to discuss their capital situations and time frames for hitting goals. “Cash management is king,” Foreman said. “Make sure your working capital is well managed and the accounts receivables are in line. Track sales closely and sales momentum to understand if there is a material shift in sales, how that then will impact the rest of the organization. “The timelines now need to be realistic in the context of the global economic markets and the challenges that they’re facing.”

MARK IWANOWSKI Board member, Akerna, Denver

Mark Iwanowski, an IT veteran and serial entrepreneur who sits on the board of Denver-based regulatory compliance technology firm Akerna, and his companies seem to exit recessions stronger than when they entered them. How? • Offering products with multiple uses. • Finding the most friction-free paths to revenue. • Having an eye for opportunities that yield big returns.

A Dual Strategy

Consider Applied Remote Technology, an underwater robotics company where Iwanowski served as executive vice president of business development when the 1990-91 recession hit. While fewer companies from the oil industry were buying the machines for underwater oil exploration, more revenue was coming in from the government and defense companies that used underwater robots for their own missions. “The dual-use strategy was beneficial for a variety of reasons,” Iwanowski said. “On the defense side, there was increased spending compared to what was happening in the oil patch. So we adjusted our efforts.” When Iwanowski makes businessdevelopment decisions, he considers the relationships between customer acquisition cost (CAC) and potential revenue per customer. “In a recession, you have to look at that relationship very carefully,” he said. The CAC can go up while the long-term value goes down. “So you look where that friction is least and look to adjust to the markets.”

Deals for Tough Times

A few years later, Iwanowski was chief operating officer of the telecom and IT outsourcing business unit at Science

failed, their equity payments would turn out to be worthless. When the tech bubble burst and hurt SAIC’s commercial business, it was able to pivot back to and ramp up defenseindustry revenue.

Hunker Down

Applications International Corp., which at the time was the largest privately held defense research firm in the country and primarily derived income from defense spending. But Iwanowski led SAIC’s foray into the commercial sector with deals that would provide the company capital to get through tough times later, including acquisitions of Bell Communications Research (Bellcore), the former research arm of the Baby Bell companies, and Network Solutions, the domain registrar. In the latter deal, SAIC paid about $12 million; about five years later, the company sold it for billions of dollars, Iwanowski recounted. “Those were crazy times when we were literally inking deals … on the back of a napkin that turned out to be a $1 billion contract,” Iwanowski said, recounting a deal with Level 3 Communications, a telecom and IT services provider. “In a way, you knew it couldn’t sustain itself, but you were going to ride it.” SAIC’s consulting business was also booming, but despite being flush with cash, they still refused businesses that offered to pay them in equity. “We did not fall into that trap of accepting equity, because we knew whenever you have such a fast upside to the market, gravity ultimately takes over,” Iwanowski recalled. If companies

When the subprime mortgage crisis hit, Iwanowski was managing partner at Trident Capital, an investment firm, and chair of one of the portfolio companies: software services firm KSR. Trident sensed credit tightening but went into defense mode after Sequoia Capital, with whom Iwanowski had worked, issued a now-famous 2008 report, “R.I.P. Good Times,” which forecast the economic downturn and instructed portfolio companies to cut costs and brace for the looming storm. “Revenue and income are going to take a hit whenever you have that serious of a downturn. So you have to throttle everything back to align with the conditions to conserve cash. Because cash is absolutely king when you’re in those situations—whether it be to conserve capital, go acquire other players that are struggling maybe more to survive the downturn,” Iwanowski said.

Akerna Applications

Iwanowski believes Akerna is well positioned to weather the recession—in large part because it has a product that’s wanted by companies that compete against each other. He calls it the “Arms Dealer Model.” “Instead of fighting the war where there’s a winner and a loser, you’re going to win no matter who wins the war,” Iwanowski said. While cannabis companies such as Akerna need to hunker down, he also believes marijuana’s essential designation will improve legalization chances in many states and create opportunities for entrepreneurs.

July 2020 | mjbizdaily.com 61

RECESSION ROAD MAP

BROKE ENOUGH

FOR BANKRUPTCY? Hemp companies in financial trouble now have the option to file for bankruptcy protectionâ&#x20AC;&#x201D;but there are alternatives businesses can try first By Laura Drotleff

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n a recession, there are bound to be business casualties—particularly in a high-risk, nascent industry such as hemp. Hemp companies have experienced a perfect storm of obstacles since legalization in late 2018—an uncertain regulatory environment, overproduction in 2019, ongoing challenges with access to banking and financial services and, now, COVID-19. In short, the odds are stacking up against hemp entrepreneurs. Bill Hilliard, CEO of Winchester, Kentucky-based Atalo Holdings, a hemp and CBD company that filed for Chapter 7 bankruptcy protection in March, said the current, challenging state of the hemp market stems from a number of factors that are beyond the control of most hemp companies, including regulatory uncertainty due to a delay of guidelines from the U.S. Food and Drug Administration and the continued struggle to secure financial services from lenders and credit cardprocessing companies. “We’re in good company in our bankruptcy here in Kentucky; four of the primary participants in (Kentucky’s 2014 hemp pilot) research program have all sought bankruptcy protection,” Hilliard said. (See “Recent Hemp Bankruptcy Filings” on page 64.) “It’s a convergence of overproduction and a lack of good guidance from the FDA and USDA (U.S. Department of Agriculture) in what our market opportunities are,” Hilliard said. Overproduction during the 2019 crop year was a result of the USDA being aggressive about finding a new agricultural crop for the American farm—with support from the industry, Hilliard said. “We led the charge … and we supported that 100%. But (the state agriculture departments) were so enthusiastic that no one contemplated that we would have the massive production that American farmers produced in 2019,” he said. “At the same time, everyone was expecting that

the FDA would come out with some guidance on what the markets were for CBD, and, of course, that hasn’t really materialized in a meaningful way so far.”

Bankruptcy Basics

Before 2014, cannabis companies of any kind generally were not eligible for bankruptcy protection under federal law, including ancillary businesses that derived any portion of their revenue from cannabis. But that changed for hemp and CBD businesses after hemp cultivation was permitted through state-led pilot research programs under the 2014 Farm Bill and subsequently legalized as a commodity under the 2018 Farm Bill and removed from the Controlled Substances Act. Today, companies associated with hemp and its derived products can legally file for bankruptcy, but their counterparts in the marijuana industry cannot (see “Bypassing Bankruptcy” on page 52), because marijuana remains a federally illegal controlled substance. Filing for bankruptcy protection helps companies that have found themselves underwater financially to either liquidate their assets to pay debts or to reorganize their business and finances to continue operating.

Lawyer Up

Business owners need to get real about their debts sooner rather than later, attorneys agreed, and if they feel as if they’re treading on dangerous ground, it’s better to call an insolvency and bankruptcy attorney before things get too bad. “We’re often late to the party,” said Michelle Novick, a partner with the Saul Ewing Arnstein & Lehr law firm in Chicago. “We want to be right there to help them make good business decisions and understand their business at a time when things are difficult.” Business owners typically will know when they’re in trouble—they can’t pay bills, default on a contract, start to see lower sales and profits or more expensive

Bankruptcy Lessons Learned from a Hemp Pioneer Filing for bankruptcy protection isn’t an ideal destination for any company. However, the stigma around it Bill Hilliard has been significantly lessened in recent years—especially in an industry as tumultuous as hemp, according to Bill Hilliard, CEO of Winchester, Kentucky-based hemp company Atalo Holdings. The company filed for Chapter 7 bankruptcy in March and is in the process of selling off assets to pay its creditors. “I’ve actually been personally a little bit surprised. … The vast majority of feedback that we’ve gotten has been very positive—about our company and the reputation that we’ve had and support for what we’ve tried to do in the hemp business,” Hilliard said. “And that’s been rewarding under unfortunate circumstances.” Hilliard said while the uncertainties confronting the hemp industry have cost many companies dearly—especially over the past year—there is much to learn from the outcome. “People need to know that there are great opportunities in the hemp industry, and I think those opportunities still exist, but I think they need to be tempered with a little bit of rational thinking as to what are the best ways to pursue those opportunities. They’re just not as expansive as they once were,” Hilliard said. “My advice is to have a controlled growth strategy as opposed to just grow as fast as you can. I think a lot of hemp companies grew to stay ahead of the competition as opposed to growing in order to create a valid marketplace.” – Laura Drotleff

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RECESSION ROAD MAP inputs. But instead of hiding, not answering the phone, ignoring creditors and hoping the problems go away, it’s more effective to face the issues and call an attorney to help develop a go-forward strategy, according to Boston-based attorney Phil Silverman with cannabis law firm Vicente Sederberg. “The most important thing is understanding Michelle Novick the financial condition of the company,” Silverman said. “In the initial stages, we pull together all the financial records so we can get a complete picture of what’s going on in the company and then pull together other corporate records to make sure, for example, that the company’s board of directors has been voting on things appropriately.” Nine times out of 10, Silverman said, he can help his clients avoid bankruptcy by developing strategies for repayment with creditors outside of court. “It’s fantastic news that bankruptcy would appear to be available to hemp companies, but not necessarily because a whole lot of hemp companies are going to start filing bankruptcy,” Silverman said. “The value of having bankruptcy available is that it becomes a threat to creditors.” Silverman noted he and other restructuring and insolvency lawyers are transparent with creditors, outlining the client’s financial situation. That includes liability, assets and available cash flow over the next 90 days as well as the value creditors will receive on their claims if they work with the debtor versus the lower amount they are likely to get in a bankruptcy scenario. “A lot of them are very willing to be paid over a longer period of time or to accept a discounted payment amount,” Silverman said. But creditors aren’t always cooperative, according to Hilliard of Atalo Holdings. “While we had very active investors doing due diligence on our company, a couple of claims came in that seemed insurmountable to us. So, as a result of those claims, the prospective investor that we were talking to in earnest at that time backed away,” Hilliard said. “Despite our requests for a couple of our creditors to sit tight while this investor was considering our company, they chose not to and that was a precipitating factor in our consideration of bankruptcy.”

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Recent Hemp Bankruptcy Filings In the past six months, the hemp industry has seen bankruptcy filings from four large, Kentucky-based companies—all considered pioneers of the hemp industry. There also is a hotly debated filing made by a Colorado-based company that owns interests in both hemp and marijuana. Sunstrand: Louisville, Kentucky-based hemp fiber manufacturer Sunstrand filed for Chapter 7 bankruptcy protection in January as fiber manufacturers struggled to find markets for their products. The company said it had between $100,001 and $500,000 in assets but owed more than $10 million. GenCanna Global: Based in Winchester, Kentucky, the vertically integrated hemp producer and CBD manufacturer filed for Chapter 11 bankruptcy in February after creditor companies lodged Chapter 11 bankruptcy petitions targeting GenCanna. According to the case file, privately held GenCanna owes between $100 million and $500 million to 50-99 creditors and has assets in the same range. At press time, a federal bankruptcy judge gave the go-ahead for the majority of GenCanna’s assets to be purchased for $77 million by GGB Investment Group, a New York-based private equity group and GenCanna creditor. GenCanna’s legal team also filed a request for the Chapter 11 case to transition to a Chapter 7 bankruptcy. Atalo Holdings: This Winchester, Kentucky-based hemp producer announced its Chapter 7 filing March 12, citing “confounding” guidance from regulators and “unforeseen market forces.” The privately held company has less than $10 million in assets but listed between 100 and 199 creditors with debts between $10 million and $50 million. CEO Bill Hilliard said at press time that the trustee reported at least three companies were interested in purchasing Atalo’s assets. Elemental Processing: This Lexington, Kentuckybased hemp processor’s Chapter 11 bankruptcy filing on April 20 noted debts that included unpaid rent. The company contracted production with thousands of farmers and then sold bulk cannabinoid extracts, some of it back to farmers. The hemp processor noted debts of $56.7 million and assets between $1 million and $10 million. UCann: This Golden, Colorado-based medical marijuana company, known as United Cannabis, also has holdings in hemp and CBD. It filed for Chapter 11 bankruptcy protection April 22. The company’s initial filing claimed debts between $1 million and $10 million owed to 49 creditors, with assets in the same range. But at press time, one of the company’s creditors asked a Colorado judge to throw out UCann’s Chapter 11 filing, saying that even if the company is only marketing its Prana Therapeutics line of hemp-based CBD products, it was still violating the U.S. Food, Drug and Cosmetics Act by making unproven health claims. – Laura Drotleff

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RECESSION ROAD MAP

BANKRUPTCY PRIMER Four main types of bankruptcy are available to businesses and individuals in the United States: ➤ Chapter 5: This is the newest option as of February. Chapter 5 bankruptcy streamlines the reorganization process so it’s less expensive for small businesses. According to Michelle Novick, a partner with the Saul Ewing Arnstein & Lehr law firm in Chicago, before the CARES Act legislation was passed in response to the coronavirus pandemic, businesses had to have a debt load of $2,725,625 or less to be eligible to file under Chapter 5 bankruptcy, but that has since changed. “Because of the CARES act, the federal (government) increased that debt limit to $7.5 million for the next year,” Novick said. However, many law practitioners have not yet seen Chapter 5 in effect because states and the federal government enacted stay-at-home orders. “We’re all going to see how that works and the benefits of it once everything gets back up and running, but the advantage now is that more companies can use it because the debt limit is so much higher,” Novick said. ➤ Chapter 7: Under this form of bankruptcy, companies go out of business and liquidate their assets with the help of a court-appointed trustee. The trustee then distributes the proceeds of the liquidation to creditors in accordance with the U.S. Bankruptcy Code. ➤ Chapter 11: As an alternative to liquidation, companies and sole proprietors can seek bankruptcy protection through a restructuring of debt to keep their businesses operating while paying creditors over time. A Chapter 11 filing for a corporation doesn’t include individuals’ possessions, but a case involving a sole proprietorship includes both the business’ and the owner’s personal assets. ➤ Chapter 13: This form of bankruptcy is structured for sole proprietorships or people weighed down by personal debt. Any individual—including those who are self-employed or operating an unincorporated business—is eligible for Chapter 13 relief, provided unsecured debts are less than $394,725 and secured debts are under $1.18 million. – Laura Drotleff

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Depending on the type of bankruptcy, businesses may be able to continue operating or be forced to sell off assets.

Businesses facing more serious issues like not being able to make payroll or pay taxes might need to look seriously at bankruptcy as an option, Novick said. Hilliard said Atalo Holdings worked closely with bankruptcy attorneys to determine the best course of action: Chapter 7 or Chapter 11. (See “Bankruptcy Primer” on page 66 to learn about the different legal bankruptcy options.) “The fact of the matter is the vast majority of Chapter 11s end up being liquidated or converted into a Chapter 7,” Hilliard said. “We looked at the opportunity for getting some debtorin-possession financing, and we didn’t see that that was immediately available. We didn’t have the cash that we thought we would need to live through a long, extended Chapter 11, and we thought going directly into Chapter 7 was a more expedient resolution of the issues that we had.”

What Happens in Bankruptcy In a bankruptcy filing, all of a company’s books and records are subject to full

disclosure to the bankruptcy court, Novick said. The court requires: • A written business plan for the future. • A list detailing creditors and leases. • Cash-flow projections and cash-flow history. • Monthly operating reports showing income expenditures and cash flow. • Accounts receivable and accounts payable. • A list of all assets owned by the company. • A breakdown detailing any and all liabilities owed. “That’s why lawyers want to meet with companies ahead of time, so we can know what those disclosures look like and decide whether bankruptcy is the most appropriate action,” Novick said. In a bankruptcy case filing, the order of creditor claims that are paid—and how much are paid—are beyond the company’s control, Novick said. “There are specific priorities established by the bankruptcy code, and once the money comes in, the court is

going to have to look at all the factors and the claims to determine what assets there are and what distributions can be made—and those are established by the bankruptcy code,” she said. In Chapter 7 bankruptcy, the company isn’t required to submit a written plan for the future. Hilliard said the process has not been simple or easy, and COVID-19 has complicated matters even further. But the time spent since the bankruptcy was decided upon and filed has been more productive. “We are spending our time now in productive pursuits, which means talking to people about what the opportunities are if they are to submit a bid and buy the assets of the company,” Hilliard said. “Prior to the bankruptcy, we spent a considerable amount of time talking to creditors who were trying to collect the debts that were due to them, and that was cutting significantly into the productive time for generating revenues for the company.” Laura Drotleff covers hemp as a reporter for Hemp Industry Daily and Marijuana Business Magazine.

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Tough Entrepreneurs hoping to capitalize on hemp textiles in the U.S. face obstacles including a lack of processing equipment and a limited number of cultivars By Ivan Moreno

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Fiber July 2020 | mjbizdaily.com

Tough Fiber

Entrepreneurs exploring the use of hemp fiber to make textiles are learning it can be a challenging endeavor in the United States. The plant’s decades-long prohibition—combined with textile manufacturing largely moving overseas—has left the country with a shortage of equipment needed to process textile-grade fabric from hemp. Those looking to enter the hemp textiles business should consider: • A North Carolina bedding startup recently partnered with Macy’s to sell its hemp bedsheets in U.S. stores. • Growing hemp for fiber is different than cultivating the plant for cannabinoids, and the machines to convert hemp fiber into fabric aren’t widely available. • Farmers and others in the industry have started working to address the lack of machinery, but it is still unclear whether hemp fiber for textiles will catch on and become profitable in the United States. Delilah Home sells bedsheets made from 100% hemp fibers. Courtesy Photo

ttentive shoppers walking through a Macy’s department store last winter might have spotted a rarity in the bedding department: hemp sheets, advertised as being 100% made from the plant’s fibers. The sheets were a rarity because such textiles are “a brand-new category” in the market, according to Michael Twer, who founded Delilah Home, the Weddington, North Carolina-based company that makes the product. Currently, 100% hemp textiles cannot be made in the United States because of a lack of equipment. “There is no American hemp fabric yet made from American-grown hemp,” said Guy Carpenter, president of Bear Fiber, a Wilmington, North Carolina-based supplier of fiber produced from hemp and other sources.

SPINNING HEMP INTO FABRIC Getting hemp from a farm to Macy’s or any other store is a time-intensive process that requires patience and a bit of luck. It doesn’t hurt to have connections with overseas factories that have machinery and technology for hemp spinning. In the United States, the technology is nearly nonexistent because growing hemp commercially has been illegal for decades and textile manufacturing largely moved overseas years ago. So Twer, who lives in Matthews, North Carolina, has had to make his products at a family-run factory in Portugal. “The U.S. does not have the machines or the technology yet to produce the high-quality textiles that I want to produce,” said Twer, who also serves as chair of the Fiber Council at the Organic Trade Association.

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Twer developed connections with factories overseas through his previous job as general manager and vice president for a European company that made organic cotton. But by January 2019, the company was sold and his position was eliminated. His idea for hemp sheets was born shortly after the family dog, Delilah, went missing for 62 days in the North Carolina mountains before neighbors helped find her. As a tip of the hat to the dog’s rescuers, and to give back to the community, he named his company Delilah Home and decided to donate a portion of profits to organizations such as Beds for Kids in Charlotte, North Carolina, and 1% For the Planet in Burlington, Vermont, which donates to environmental nonprofits worldwide. The company also has donated sheets

Tough Fiber

Brothers Jay, left, and Ty Stukenholtz stand in front of “The Interceptor,” a machine they invented to perform some of the same tasks as a hemp decorticator, which is an an expensive piece of equipment in short supply in the United States. Courtesy Photo

and fabric bags to Love to Sew Studio in Pennsylvania to make face masks for hospitals, care facilities, veterinarians and police during the COVID-19 pandemic. Sales were sluggish to start in November, when Deliah Home launched, but the few hundred sets of bedsheets Twer had at Macy’s sold out by the end of March. Twer also sells the sheets through Amazon, Zola and on the Delilah Home website. The sheets aren’t cheap: A king-size set sells for as much as $800. So why would consumers buy hemp bedsheets? “It’s one of the most durable fibers there is in the marketplace,” Twer said. “It’s breathable, so when you’re putting (hemp) into bedsheets, it allows the heat to be released … versus a microfiber, where you get in the sheets and you sweat because the heat doesn’t have a chance to release.” Twer and others say it’s possible prices for hemp textiles will come down eventually. The demand is there, he said, but there isn’t enough processed

hemp fiber. That’s because making hemp textiles is an arduous and expensive process, especially when the right machinery isn’t readily available. “Everybody wants to buy something that’s made out of hemp, and that’s great,” said Jeffrey Silberman, a professor at the New York-based Fashion Institute of Technology. “They see that farmers are growing hemp, and they see that all of a sudden hemp products are available. And on some level, I think that they’re missing the fact that between the farm and the finished products on the shelves, there’s a whole world … of processing fiber—processing for yarn spinning, in particular—that isn’t being done here.”

OTHER COUNTRIES AHEAD IN HEMP TEXTILES Countries outside the United States have been using hemp for decades. “China is one of the largest suppliers of finished hemp textiles, even though their processes are not environmentally friendly. Europe is the second-largest producer,

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Guy Carpenter

where France has had a stable industry and hemp supply chain,” said Geoff Whaling, chair of the National Hemp Association. “They are one of the only countries to have never banned hemp.” Markets in India, Poland, Portugal and Romania are growing, which Whaling said “speaks to the growing consumer demand.” A U.S. company that wants to mass-produce a hemp textile line global-

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Tough Fiber

Hemp fiber must be cottonized, or cut to 1-2 inches, to be spun on cotton machinery.

ly would have to be assured a continuous supply of “cottonized” hemp, he said. “That does not exist today.” To cottonize hemp is to cut the fibers short enough—to about the same length as cotton, 1 to 2 inches—so that the hemp can be spun on cotton machinery. Carpenter, whose company specializes in cottonization, has been making and selling clothes for other brands for 35 years and has spent 20 of those years working with a partner in China to develop different blends of hemp and other fibers to make yarns for textiles. China is the No. 1 source of textile-grade fiber—not the type of hemp fiber used for composites or for paper, Carpenter said.

Jeffrey Silberman

The challenge of developing hemp fibers from U.S. hemp, Carpenter said, doesn’t begin with machinery; it begins with growing the plant differently than the way it’s done for CBD.

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“We have to encourage farmers to grow hemp for fiber,” Carpenter said. “When you grow (for) CBD … you’re growing it like a Christmas tree, so that it has lots of branches and flowers.” “For us,” he continued, “the only thing we care about is the stalk. We’d like it to be no thicker than a chopstick usually, or a No. 2 pencil, and usually that means it’s about 6 to 8 feet high.” Hemp grown for long fibers, which can be as tall as 12 feet, are planted extremely close together so the plant doesn’t grow branches and instead uses all its “energy to grow up, up and straight, to create long, parallel fibers in the plant,” Carpenter said. That, he said, is how you make textile-grade fibers.

Once those are cottonized, the “fiber can be utilized in 99% of the world’s yarn-spinning industries, which are all designed to process fiber from a general length of cotton fiber,” he said. Carpenter said his company is working with a cotton gin manufacturer, the Lummus Corp. in Savannah, Georgia, to develop an affordable hemp decorticator. Decorticators, which can cost more than $2 million, separate hemp components using hammermill technology, through which the plant is hammered, rolled or crushed into its components. “We’re going to make sure farmers get a seat at the table in the fashion industry with hemp,” Carpenter said. Farmers can “extend their business life” by planting hemp when they’re not cultivating cotton, he said. In fact, a Dallas company called Panda Biotech, for which Carpenter is a consultant, plans to build a processing center with two large decorticators in Shallowater, Texas. The company also is giving interested farmers 60 tons of seeds for hemp fiber.

RESEARCH AND PROCESSING EQUIPMENT NEEDED Ty Stukenholtz, a farmer and agricultural engineer in Auburn, Nebraska, said he believes research into plant genetics for hemp plants that produce the best fiber would go a long away—as would some ingenuity when it comes to processing equipment. Stukenholtz and his brother, Jay, are planning to plant 20 acres of hemp this year, including a hybrid called “Abound,” which Stukenholtz said has been bred for multiple uses, including fiber, seed and oil. Made by New West Genetics in Fort Collins, Colorado, the plant grows shorter, about 6 feet—or around half as much as some plants. “A farmer would have choices now,” he said. Ty and Jay Stukenholtz developed their own version of a decorticator by connecting a John Deere S Series model with equipment they call the “Interceptor Hemp Harvesting System,” which is

Michael Twer—seen with, from left, daughter AnneLeigh, wife Paige and daughter JJ—named his company Delilah Home after the family dog, standing front and center. Courtesy Photo

designed to perform some of the same tasks as a decorticator and is “capable of processing large volumes” of hemp. The brothers are doing a limited production run to sell the equipment this fall, with the Interceptor priced at $70,000. “It may not be the finished product needed, but it certainly has the potential to aid in the process of breaking down the hemp fiber into its components, bringing it a step closer to mass production for textiles and other uses,” he said. Ultimately, the goal is to be able to produce hemp fiber affordably, at a large scale. “The textile market is already established at a low cost, so to be competitive, all the equipment involved needs to be large scale,” Stukenholtz said.

HEMP LINE SPINNING VERSUS COTTON SPINNING For Twer’s sheets to be 100% hemp, they weren’t cottonized but rather spun on traditional hemp line spinning, Silberman said. “I don’t know of anybody that’s putting in a new, long-line hemp spinning, but I do know that people are converting all of their cotton spinning to a cotton and hemp blend,” he said. Silberman said it is possible for hemp textiles to catch on, but with some

caveats—No. 1 being “if the investment in infrastructure and time were put into it,” he said. The bigger questions, he said, are whether American hemp can be successful, and whether U.S. companies can participate profitably, including the farmers. “The growing is not a problem, but the fiber processing through yarnspinning equipment is,” Silberman said. Hemp textiles also have a lot of competition, he said, adding that global production of cotton is roughly 25 million metric tons a year. Polyester is much more than that, Silberman said. “You have a market where you can get market share, but you can’t possibly get your production to 25 million metric tons to truly compete with cotton,” he said. Sarah Harf, CEO and founder of San Francisco-based MoonCloth Designs, which supplies hemp products and textiles to luxury hotels such as Soho House and Casetta Group, said educating farmers and the public is a big part of the challenge in advancing the industry. “People think hemp is CBD; it’s not,” she said. “CBD is one very tiny element of the hemp industry. Europe and Asia have been doing industrial hemp for decades, so there’s a lot we can learn from them, and we just need to be able to adapt out here and be able to start investing in these larger supply chains.” Twer, for his part, remains encouraged by his business. “We’re starting to gain some strong momentum as people become aware that hemp textiles do exist,” Twer said. But he’s also realistic about how long the industry has to go to master producing hemp textiles on a massive scale. “There’s obviously a science, and we’re just not there yet,” he said.

Ivan Moreno is a reporter for Hemp Industry Daily and Marijuana Business Magazine.

July 2020 | mjbizdaily.com

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l a e p p A To reach active consumers, CBD companies build relationships and turn to pro athletes, social media

By Gary Band

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g n li teurs a m A

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Rachael Rapinoe, right, CEO of Mendi, recruited her twin sister, Women's World Cup champion Megan Rapinoe, to serve as a brand ambassador for the Portland, Oregon-based company. Courtesy Photo

ajor League Baseball announced in December that it had removed cannabis from its list of banned substances, permitting active players to use hemp-derived CBD products. In February, NFL team owners approved the terms of a deal that would do much the same—and more. Which begs the question: If CBD products are fine for professional athletes, why not amateurs? As CBD use and acceptance increases, more opportunities for companies interested in working with athletes exist within the amateur market—from teenagers to adults engaged in all kinds of sports. The potential pool of customers is large, given that millions of Americans play basketball, baseball, hockey, golf and other sports in their spare time. These same amateurs might turn to hemp-derived CBD to ease sore muscles and joints. “We all have an endocannabinoid system, and everyone needs to feed it,” said Rachael Rapinoe, CEO of Portland, Oregon-based CBD company Mendi.

Rachael also is the twin sister of Megan Rapinoe, 2019 Women’s World Cup Most Valuable Player and 2019 Sports Illustrated Sportsperson of the Year. Rachael Rapinoe launched Mendi during the 2019 Women’s World Cup; the company sells a line of hemp-derived CBD gummies, salve sticks, gel caps and massage oil. Megan Rapinoe is a Mendi brand ambassador.

MARKETING MATTERS The CBD market is forecast to post strong growth over the next few years, thanks to the passage of the 2018 Farm Bill legalizing hemp. According to the 2019 Hemp & CBD Factbook, hemp-derived CBD sales are projected to reach $9.3 billion-$11.3 billion by 2024, up from $1.1 billion-$1.3 billion in 2019. (See chart on page 84.) To reach amateur athletes, CBD companies are employing numerous marketing strategies through their websites and social media channels. They also are deploying brand ambassadors and signing endorsement deals with big-name athletes. And

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CBD companies are eyeing the market for amateur athletes. The potential pool of customers is large, given that millions of Americans play sports in their spare time. Here’s what you need to know: • To reach amateur athletes, CBD companies are employing numerous marketing strategies through their websites and social media channels. • Hemp-derived CBD businesses also are deploying brand ambassadors and signing endorsement deals with big-name athletes. • CBD companies catering to high school athletes are advised to create relationships with school professionals, including coaches. • It’s also important to meet standards and follow the rules, such as listing the correct amount of CBD or THC on product labels. • According to the 2019 Hemp & CBD Factbook, hemp-derived CBD sales are projected to reach $9.3 billion-$11.3 billion by 2024.

before the COVID-19 outbreak, company leaders also attended sporting events and other non-industry-related shows across the country to promote their products to athletes. According to Brady Bell, CEO of Evergreen, Colorado-based Pure Spectrum, which sells a line of hempderived CBD tinctures, topicals and isolates, amateur athletes represent a majority of the company’s customer base. Bell believes his products can help athletes, and he suggests high school athletes consider taking CBD. At press time, Pure Spectrum was planning to bring on a high-profile athlete to launch its “Cannabinoid Kids” campaign. Bell said the main concern, especially among parents of high school athletes and military personnel, is whether the product contains THC—for which a person may be tested and perhaps suspended or, in the case of the military, lose a career. That said, the high school market is huge. The number of participants in high school sports in 2017-18 reached nearly 8 million, according to a survey conducted by the National Federation of State High School Associations.

ADVICE AND CONSENT For CBD companies interested in breaking into the high school athlete market, Bell advises businesses create relationships with parents and school professionals. “If you don’t have the ability to show where your product comes from, what it contains and why it helps, you’re not going to get in front of these entities,” Bell said. He advises companies looking to approach schools to take it slowly. “Talk with parents and coaches behind closed doors,” he said. “Whether it’s for football or basketball, baseball or tennis, CBD is preventative, like vitamin C. It should be taken every day. But if you don’t get into that circle of trust, it’s not going to happen.”

Overcoming Hurdles and Growing Organically Like countless other cannabis companies, Pure Spectrum’s initial hurdle was accessing conventional financing and banking services. Brady Bell started the Evergreen, Colorado-based CBD company with $75,000 in 2015.

Brady Bell

Bell said he has established relationships with high schools in his local community in Colorado. He also sponsors fourth-grade basketball and football teams in his Kansas hometown. “I pay for their expenses and help them with getting into tournaments around the U.S., ” Bell said, noting that both Kansas teams won state championships. How does he approach the parents of high school athletes? “When I start discussing CBD with parents, I always start with our proven testing protocols,” added Bell, whose 12-year-old daughter competes in kickboxing, jiu-jitsu, track and basketball and takes CBD daily. “It’s a slow process, setting times to talk to parents, educating and trying to change mindsets,” he said. “But that’s the way we build trust and relationships and educate about how these products can help. “We aren’t out here actively selling to kids; that isn’t the strategy. We are being active in the educational aspects and the ‘why.’ It’s all about education.”

GET SMART Eric Smart, CEO of Denver-based Myaderm, came to the CBD industry as a former executive in the food manufacturing and commercial pharmacy industries. Myaderm makes hemp-derived CBD creams for athletes

Bell, the company’s CEO, decided against taking investments and sharing equity and, instead, grew Pure Spectrum organically. The company sells a line of hempderived CBD tinctures, topicals and isolates, and experienced more than 1,000% revenue growth between February 2018 and December 2018. Looking back, Bell said he avoided taking on investors and equity shares because he would have given up a large percentage of his company. Instead, he took out a $1 million loan at 41% interest and managed to pay it back in 14 months. The stigma associated with cannabis is another issue he works around. “You have to understand how to connect with people who might object to this,” Bell said. “To push back when challenged without offending. Everyone is skeptical at first, as they should be. But you need to know what information to provide that lowers objections and gets people to listen to you.” Bell encourages his customers to use topicals in order to treat pain on hands or feet and tinctures for greater effectiveness on pain throughout the body. For those just starting in the CBD space, Bell likened the industry to a marathon. “You can’t go at it like a sprinter. But if you have the correct mentality and intention, you can succeed. There’s lots of companies out there bigger than us. We can’t compare to companies like Charlotte’s Web, but we’ve learned a lot from them.” – Gary Band

July 2020 | mjbizdaily.com 83

Appealing

to Amateurs

ANNUAL U.S. HEMP-DERIVED CBD RETAIL SALES ESTIMATES: 2019-2024

Hemp-derived CBD sales are expected to reach more than $9 billion per year by 2024, according to Hemp Industry Daily.

and active people and sells them online and at brick-and-mortar retail outlets. Soon after the Farm Bill passed, health and wellness retail giant GNC began carrying Myaderm products. And since late November 2019, the company’s sports cream line has been sold at Dick’s Sporting Goods and Golf Galaxy stores. “If you’re going to get into this market, you need to look at the regulations and meet the requirements,” Smart said. “Follow the rules and make products meet the standards.” For example, companies can’t make medical claims, and they must list the correct amount of CBD and/or THC in their products. In terms of marketing, Smart said Myaderm hasn’t sought out sponsors or partnerships with athletes. He continues to do sales through the company web-

ALL THE RIGHT MOVES

Eric Smart

site and e-commerce sites. The company also has an active social media presence.

84 Marijuana Business Magazine | July 2020

Pure Spectrum also uses social media and live events to pitch its products to amateur athletes of all ages. Bell noted his company has been successful in using brand ambassadors such as former NFL star and sports commentator Shannon Sharpe to promote the company’s products online and using live platforms. Retired NFL players were among the first to embrace Pure Spectrum products, Bell said. “We worked with the Denver Broncos Alumni Association and had 24 players come out to our grand opening back in 2015, ” Bell said. “Seventeen former L.A. Chargers came out to the opening of our retail space in San Diego.” Athletes from the Ultimate Fighting Championship (UFC), the mixedmartial-arts arena and CrossFit were also among the first entities with which

Bell built relationships. In addition, they were among the most receptive to his outreach and marketing. Jeff Novitzky, the UFC’s vice president of athlete health and performance, “was very open-minded and willing to learn about our products as well,” Bell said. “Every sport at every level has a bureaucracy, but the best ones listen to their athletes and let them have a voice.” `

MENDI’S MOMENT

Meanwhile, Mendi has looked beyond women’s soccer and was recently asked to pitch the NFL Players Association. “Our core mission is to improve the lives of all athletes—those obsessed with working out and living the most healthy and active life possible,” Rachael Rapinoe said. To date, Mendi has directed most of its resources and marketing toward the

Sports commentator and NFL Hall of Famer Shannon Sharpe is a brand ambassador for Colorado-based Pure Spectrum. Courtesy Photo

soccer community. Soccer and basketball players have so far been most receptive to the brand, which counts gummies and salve sticks as its best sellers. To help promote its line of products to those 18 and older, Mendi partners with high-profile professional athletes to reach that fitness-focused consumer base.

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“By signing Megan Rapinoe as our first athlete ambassador, sponsoring two National Women’s Soccer League (NWSL) teams and getting eight NWSL players on our cap table, our tactics were very bold and clear: completely embed ourselves in soccer and own this space, which we’ve done,” Rachael Rapinoe said. In February, Mendi extended its athlete alliance into basketball by signing Sue Bird, an Olympic gold medalist, star of the Women's National Basketball Association's Seattle Storm and Megan Rapinoe’s partner, as a brand ambassador. “We want to continue expanding our multi-league partnerships,” Rachael Rapinoe said. “However, we want to make sure it’s not a league or market that’s already flooded with CBD companies. It’s all about relationships, quality products and foresight.”

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Head Start Getting a

By Jeff Smith

88 Marijuana Business Magazine | July 2020

FOUR TIPS

to help marijuana companies prepare for federal legalization

ederal marijuana reform still might be several years away, but experts say it’s not too early to prepare for that day. Executives who entered the sector from other industries say cannabis businesses need to measure themselves in standard ways, such as by the financial metrics and models used by consumer packaged goods (CPG) companies. Keys to preparation include getting your financial house in order (cash flow is king), protecting your intellectual property as well as strengthening your organization and brand while advocating for the kind of reform you want to see. In the following pages, experts share what it will take to be ready when federal legalization of marijuana occurs.

Develop financial pro formas and budgets based on realistic sales forecasts “There’s a huge culture gap between those who pioneered the industry, the investors and those new to the industry,” said Lee Dorkin, founding member of Denver-based Emprouen Advisors, a cannabis management and consulting firm. Dorkin is former head of U.S. operations for Origin House, a Canadian cannabis company that was acquired earlier this year by Cresco Labs. Often, he said, cannabis companies lack realistic financial forecasts, profit and loss statements, budgets, cash-flow

projections or even a full understanding of the tax implications of running their businesses. They need battle-tested businesspeople who can bring in that expertise, Dorkin said. That means adopting practical management tools such as sales and demand forecasting as well as rolling forecasts. For example, a company working off an annual budget should

Federal marijuana legalization might seem far in the future, but it’s not too early to develop the solid foundation needed to prosper in a post-reform world. Experts say the following strategies should be foremost in executives’ minds: • Adopt tried-and-true financial models used by other heavily regulated industries and develop realistic sales forecasts that are adjusted quarterly. • Develop policies that help protect your intellectual property. • Strengthen your organizational structure and develop a branding strategy that can be expanded nationally. • When lobbying for reform, don’t forget about the influencers in your local community. • Expect additional oversight and respond to challenges in a transparent and cooperative way.

July 2020 | mjbizdaily.com 89

Head Start re-forecast sales for the next 12 months every quarter. “You have to build a financial model based on what you know today and then prepare for the future,” Dorkin said. He further advised including the entire management team—sales, supply chain, manufacturing, distribution—in monthly planning and scheduling review sessions to strengthen decision-making. Such forecasting might be even more critical with the coronavirus outbreak, a capital crunch and the specter of a recession. Cash today truly is king, Dorkin noted. While many founders have a passion for the business and technical expertise, Dorkin has found some are resistant to incorporating the data essential to developing meaningful forecasts. One excuse Dorkin hears is a lack of data. But he noted many markets now have historical sales data, which is the basis for demand planning that feeds into “what and how much we should produce.” “Cannabis businesses are still resistant to building a financial model based on practical inputs,” Dorkin said. “Why? Wanting to be off-the-grid, different, not wanting to be corporate.” But the basics of running a sustainable business are “absolutely applicable” to cannabis, he said. The day of reckoning already is here for many companies—witness the carnage in California and mandatory shutdowns in some locations because of the coronavirus—and federal marijuana legalization could usher in a second day of reckoning if companies aren’t on solid financial footing.

Protect your intellectual property “One of the biggest areas of contention and litigation in the future is going to be intellectual-property matters,” said David Wunderlich, senior attorney at McAllister Garfield, a Denver-based law firm specializing in marijuana and hemp law.

Develop a consistent brand and strengthen your organizational structure

Consider having employees sign nondisclosure agreements preventing them from divulging trade secrets after leaving the company.

While it’s virtually impossible now for cannabis companies to obtain federal trademarks for much beyond their logos, businesses can still proactively protect their trade secrets, Wunderlich said. “There’s a lot of things commonly known in the industry about processes, but plenty of companies are doing innovative things,” he said. “Those trade secrets should be treated accordingly.” For example, make sure policies are in place to protect valuable information as much as possible from employees who don’t need to know it, and have employees sign nondisclosure agreements preventing them from divulging trade secrets after leaving the company. Companies also need to be careful that proprietary information is safeguarded when hosting suppliers and other guests on-site. This is critical not only for competitive reasons but also if owners of a marijuana company want to exit the business after legalization. Buyers, Wunderlich explained, “will want to be comfortable with your ownership of intellectual property.” They won’t want to buy assets that are loosely protected or are under the strain of litigation because of intellectual property breaches.

90 Marijuana Business Magazine | July 2020

Cannabis brands don’t have as much value as they could, especially in crowded state-legal markets such as California. One reason: Budtenders—often individuals in their 20s—have a lot of influence in what consumers buy, and their preferences might not square with a company’s overall brand strategy. It’s essential that companies develop consistent branding in advance of federal legalization, experts say. Take it from multistate operator Cresco Labs, which last year integrated its dispensary brands in 11 states under one umbrella called Sunnyside. That’s just one element in creating a fundamentally sound and scalable company in advance of federal legalization, said Charlie Bachtell, CEO of the Chicago-based company. Also critical is strengthening the organizational structure, in part by recruiting talent from industries relevant to cannabis such as CPG and pharmaceuticals. For example, Cresco recently hired Greg Butler, who has a background with Pfizer, Johnson & Johnson and Molson Coors, to serve as its first chief commercial officer. Cannabis companies also should work to clearly define their corporate missions, bolster their standard operating procedures and approach to production, supply chains, warehousing and distribution. To an extent, “I think everything we’re doing is in preparation for federal legalization,” Bachtell said.

Lobby for reform and engage in the community Caren Wilcox, executive director of the U.S. Hemp Growers Association, said the 2018 federal legalization of hemp is really

Head Start the result of “determined grassroots people who went to Washington to tell their story.” Farmers called on their congressional representatives and eventually began to see results. Legalization took a first step with a provision in the 2014 Farm Bill allowing a pilot hemp research program overseen by states. Then, through that reform, a story could be told on Capitol Hill of “real, verifiable success and real products,” Wilcox said. But Saphira Galoob, founder and CEO of The Liaison Group, a Washington DC-based cannabis lobbying firm, said marijuana companies also need to think about their “local influencers,” which include community leaders, chambers of commerce and social or service groups. Reach out to those constituencies, Galoob advised, and let them know you want them to feel comfortable with your presence in the community and that you’re committed to be a good corporate citizen. It’s not just about meeting expectations but exceeding expectations and, when something goes wrong, about being transparent, cooperative and conciliatory, she said. “The more we normalize ourselves, the more normal we become,” Galoob said. Ancillary companies also can be a powerful and credible advocate for reform. In fact, support from the American Bankers Association, National Credit Union Association, real estate groups and others helped tip the scales leading to the U.S. House of Representatives’ momentous passage of cannabis banking reform in 2019. Hemp Industry Daily Editor Kristen Nichols contributed to this report.

Jeff Smith covers regulatory and government issues for Marijuana Business Magazine.

92 Marijuana Business Magazine | July 2020

Learning From Hemp Legalization Marijuana companies can look to the hemp industry for guidance on how to prosper after eventual federal reform. Cannabis companies have become more professional over the years and are used to a patchwork of state regulations. But the combination of state and federal oversight will put many businesses to the test. The nationwide legalization of hemp via the 2018 Farm Bill has translated into a protracted period of rulemaking as well as federal and state scrutiny— not to mention slow access to banking services. To survive and thrive in the postreform world, cannabis businesses will need to be well-run with strong skills, business savvy and patience. “Expect constant change and more regulation,” said Diane Czarkowski, co-founder of Canna Advisors, a Colorado-based firm that provides a range of consulting services for marijuana and hemp companies. Experts advise businesses to anticipate changes now by adopting the highest standards from other heavily regulated industries. “The coin of the realm going forward is going to be following best practices and being a responsible industry participant—whether you’re a hemp company producing CBD or a (marijuana) company with THC products or a company involved in both markets,” said Michael Bronstein, co-founder and president of the American Trade Association of Cannabis and Hemp.

Don’t Expect Anything in a Hurry It’s great to be positioned to hit the ground running when marijuana is legalized federally, but don’t expect federal regulators to do the same.

Based on U.S. agencies’ movement—or, in some cases, lack of movement—since the legalization of hemp, federal marijuana policy development is likely to be a gradual process. The U.S. Department of Agriculture spent nearly a year developing interim final hemp rules. As of mid-May—17 months after legalization—only 15 states had received USDA approval for hemp production plans under the interim

final rule. More than 20 states were opting to follow 2014 pilot rules. “It’s going to take years for (hemp) policies to be put in place,” said Geoff Whaling, chair of the National Hemp Association in Washington DC. The banking industry also has been slow to offer services to hemp businesses. It takes time to understand a new industry, and bankers need to feel comfortable in assessing the risk, Whaling said. Many financial institutions still view the nascent hemp industry as too risky to serve. “It took us seven months to get credit unions to accept our business,” he said. “It took (the U.S. Treasury Department) almost a year to tell the banks they could serve us.”

Expect Additional Oversight

The U.S. Food and Drug Administration and other federal agencies will scrutinize the marijuana industry after federal reform—although how quickly that happens will depend on the kind of legislation that passes. “We know that all the various operations along the supply chain might have unique oversight from the federal government,” Czarkowski said. Marijuana companies should anticipate how federal oversight might impact their business and implement those changes now, before they are mandated, she said. Bronstein’s trade group currently is working with a dozen state-level organizations, regulators and industry to develop standards for testing, transport, quality management, track and trace, security and more. The goal is to develop uniform standards to cover every state that has an adultuse or medical marijuana program, Bronstein said. Such standards would smooth out the regulatory bumps that will come with federal legalization. Even after federal legalization occurs, marijuana businesses should expect a continued patchwork of state laws and regulations, which likely will complicate cross-border commerce in some regions of the country. – Jeff Smith

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BestPracticesInExtraction | Bart Schaneman Extraction labs need to be designed to allow for workers to move around freely as the business expands. Courtesy Photo

How to Scale Up an Extraction Facility E

very cannabis extraction company hopes it will need to expand as a result of successful business operations, but scaling up in a financially prudent way requires foresight and patience. Marijuana processors considering the best way to grow their business should keep three things in mind: • Build your facility to mirror the current market and the market’s potential. • Choose equipment that allows for add-ons and expansions. • Design a facility that can be easily modified and reconfigured. Even though some cannabis companies might be battening down the hatches and preparing for the

worst because of the coronavirus pandemic, others are still bullish about the potential in this industry. “There’s no better time than now to expand your business if you’re serious,” said Mara Gordon, co-founder of cannabis company Aunt Zelda’s in Sonoma County, California. “The whole entire game has changed now that we’re an essential business,” she said, referencing the designation states offered to companies allowed to stay open during the coronavirus pandemic.

Build for the Market At Zelira Therapeutics, a Philadelphia-based cannabis company with an in-house extraction

96 Marijuana Business Magazine | July 2020

Successful cannabis extraction facilities typically will need to expand to keep pace as the business grows. As a marijuana extraction company scales up, it’s helpful to consider: • Building the facility not only to meet the needs of the current market but also to allow space to grow as the market expands. • Selecting an extraction system that allows for add-on components. • Configuring the facility to be customizable and even have portable rooms, if necessary. • Confining messy processes to a separate room helps prevent cross-contamination.

lab, CEO Oludare Odumosu judges the size of his operation by what the market can allow. “You want to build to potential,” Odumosu said. When Zelira Therapeutics first started in Pennsylvania, Odumosu constantly evaluated the patientpool numbers and tried to expand his CO2 and ethanol extraction units accordingly. To allow his operation to scale up, Odumosu put in the infrastructure for a time when expansion would be necessary. For example, the building was wired with electrical capacity that exceeded the company’s initial need. It also was outfitted with an air-compressor line that could feed into multiple spaces, though that wasn’t required at the beginning. Ultimately, Odumosu underestimated the size of the Pennsylvania medical marijuana market. The projected patient pool he referenced was 35,000, but the pool ended up totaling 80,000. “If we knew that was going to happen, everyone would have built bigger,” he said.

Add-on Ability Odumosu also recommends buying extraction equipment that can accept add-on pieces. “Configurable units are key,” he added. Tully Stroud, chief scientific officer at Elite Molecular, a cannabis business based in King County, California, said the equipment his company uses is modular and can receive additional like parts. So far, he has added six different features to his system as the business scales up. Like Odumosu, Stroud recommends building out and expanding extraction equipment concurrent with the growth of the economy in the state where the business operates. “You want to scale appropriately to your market size,” he added.

When thinking about adding equipment such as the rotary evaporator in this photo, cannabis companies should consider how well the system can accommodate add-ons. Courtesy Photo

Mara Gordon Photo by Natalyia Arditi

His team’s thinking was to avoid producing more product than the market allowed. To determine that, they evaluated California tax revenue and built relative to that. “Most of your equipment needs to be chosen for 20% more capacity than what you’re producing,” Stroud said. As far as the facility, Elite Molecular is working in a building with 11,000 square feet of space, though it has developed only about 5,000 square feet so far.

Stay Flexible For Gordon, designing Aunt Zelda’s extraction facility to allow for

modifications was key to her success in scaling. The facility she moved into was 7,500 square feet—although she needed only 2,500 square feet at the time. That allowed for growth and to add different rooms. Inside that facility, Gordon set up a “clean room,” which she describes as similar to a surgical tent with electric fans where her crew bottled and filled oil containers. The clean room can be moved to another facility as the business grows. Aunt Zelda’s also installed two cargo containers in the main cargo area—one for keef production, a messy process that is good to keep separate from the rest of the business. The containers can be moved to another facility if Gordon ever maxes out her space. “It’s nice to have the freedom of that,” Gordon said.

Bart Schaneman is a reporter for Marijuana Business Magazine.

July 2020 | mjbizdaily.com 97

IndustryPlayers | New Hires & Promotions

Alex D’Amico

By Omar Sacirbey

Recession-Proof Executive

lex D’Amico’s skill set is in demand and necessary in just about any industry and at any time. Why? Companies can't do without accounting, and the new chief financial officer for Floridabased multistate operator Trulieve has plied his accounting know-how in myriad settings. Most recently, D’Amico—who started his new position at Trulieve on June 1—was vice president of finance/controller for Telaria, a global software company listed on the New York Stock Exchange. Before that, he was director of finance/global controllership with Cognizant, a Nasdaq-listed IT services company. D’Amico held senior finance roles at two other NYSE companies: Quest Diagnostics, a medical lab business, and Synvista Therapeutics, a biopharmaceutical company. He started his finance career with media and entertainment firms such as Screenvision and BMG Entertainment. Trulieve used a professional executive search firm to recruit D’Amico, who was looking for a change but didn’t have cannabis on his radar. When Trulieve came knocking, D’Amico was immediately intrigued by the sector and the company. “I was blown away with the outreach and the scope of what the company is doing for people,” said D’Amico, who will continue to reside in northern New Jersey but frequently commute to Trulieve’s headquarters in Tallahassee. D’Amico’s first goal is setting up infrastructure and hiring staff for Trulieve’s finance department. “I have a bunch of new hires coming in this month,” he told Marijuana Business Magazine. Trulieve also has plans to go public, so D’Amico’s second priority will be to file a Form S-1 with the U.S. Securities and Exchange Commission. “When we do that and are listed with the SEC, and we’re on U.S. GAAP (generally accepted accounting principles) financials, (the) SarbanesOxley (Act of 2002) will be coming down the pike and we need to build the infrastructure to be ready for that,” D’Amico said in early June.

98 Marijuana Business Magazine | July 2020

A look at some recent hiring moves in the marijuana industry

iAnthus Co-Founder, CEO Resigns Amid Scandal Hadley Ford resigned as CEO and a director of multistate cannabis operator iAnthus after a company investigation found he failed to disclose two loans totaling $160,000 in what was determined a “potential or apparent” conflict of interest. Ford’s May resignation followed New York-based iAnthus defaulting on a $4.4 million interest payment and saying it was seeking strategic alternatives. Several lawsuits claimed that iAnthus failed to disclose material adverse information in the months leading to the interest-payment default. Ford co-founded iAnthus in 2014 after 14 years on Wall Street, including time spent at investment banking giant Goldman Sachs. Randy Maslow, iAnthus’ other co-founder, was appointed interim CEO. Maslow is a telecom and internet veteran who has served as president and a director of the company.

 Erstwhile Harborside Exec Joins Consultancy Andrew Berman, who served as CEO of Harborside, the well-known Oakland, California, cannabis retailer, from January 2018 to October 2019, joined Maine-based consulting firm Nucleus One. During his tenure, Berman oversaw Harborside’s transition to a publicly traded company. His industry experience also includes having been a partner or investor in four other marijuana companies, including ZG Ventures, Maui Wellness Group, Soothe Ohio and CG Global Therapies. Berman will be based in San Francisco, giving Nucleus One its first footprint in the western United States. The company already has offices in Boston and Portland, Maine.

CannaCraft Board Adds New Members CannaCraft, a large-scale cannabis manufacturer in Santa Rosa, California, appointed Leon Sharyon, Mason Garrity and Gareth Clarke to its board of directors. Sharyon served as chief financial officer at Lagunitas Brewing for more than a decade before playing an instrumental role in the brewery’s acquisition by Heineken. Before Lagunitas, he was a managing director in the Global Equity Linked Product

Group at Merrill Lynch and CFO of eTag Technology, a tech startup. Garrity is currently the chief operations officer for the Rudd Collection, which includes Press Restaurant, Rudd Estate and Crossroads by Rudd. Before that, he was vice president of strategy at 3Q Digital, a marketing agency in the Bay Area. Most recently, Clarke served as chair and CEO at Innovation Technologies, a medical device company. He also served as CEO at Inviro Medical Devices.

Indus Financing Followed by Executive Changes Concurrent with a $15.1 million convertible debenture financing completed in April, Salinas, California-based Indus Holdings, a vertically integrated cannabis company, made changes to its leadership team and board. Robert Weakley resigned as CEO and chair of the board, though he will remain on the board as a director. Mark Ainsworth (pictured), who co-founded the business in 2014 and had been chief operating officer and executive vice president, was appointed CEO. Ainsworth is the co-founder of Pastry Smart, an organic bakery in California that supplied Whole Foods Market and other businesses before closing in 2014. Steve Neil was appointed CFO. His pre-Indus resume includes CFO stints at Stockton, California-based Diamond Foods, eyewear brand Sola International and the international division of Perrigo Co., a major Irish pharmaceutical firm. Kelly Crampton was appointed senior vice president of distribution. Before joining Indus, Crampton

served as a board member and strategic adviser for several multichannel product distribution companies in industries that included consumer goods, customer service, food products and agriculture. He also spent 27 years with Excelligence Learning Corp., a distributor of educational products, including nine years as CEO. George Allen, founder of Geronimo Capital, an Indus investor, was appointed chair of the board, which added Brian Shure and Kevin McGrath. Arthur Maxwell resigned from the board.

Neptune Nabs CPG Vet, Walmart Exec for Top Spots Neptune Wellness Solutions, a marijuana and hemp production and processing company based in Quebec, has tapped executives from Unilever and Walmart for its U.S. sales and health and wellness efforts. Neptune appointed Russell Jay as vice president of U.S. sales. Jay joins Neptune from Liviva Foods, a plantbased food company where he was chief customer officer for West Coast operations. Before Liviva, Jay served as vice president of sales strategy at Henkel Consumer Goods, where he led sales strategy and planning for Henkel’s laundry, home care and beauty brands, including Dial. Jay also spent more than a decade at Unilever as a customer marketing manager. Robert DiPede joined Neptune as senior vice president of the company’s Biodroga business unit and recently-formed health and wellness innovation division. Neptune acquired Biodroga in 2016. DiPede joins Neptune from Walmart, where he was director of territory and global export sales.

CEO Now Permanent Clear Cannabis, a Denver-based distributor that also licenses

The Clear concentrates, promoted Tom Brooksher to CEO in May. Brooksher had served as interim CEO since February. Before that, he was chief learning officer at the Cannabis Industry Institute, an employeetraining organization in Denver.

MSO Gets New CEO Body and Mind, a cannabis multistate operator listed on the Canadian Securities Exchange, promoted Michael Mills from interim CEO to CEO. The company has operational assets in Arkansas, California and Nevada and is developing assets in Illinois and Ohio.

 A Celestial CEO for Supreme Beena Goldenberg, former CEO of Hain-Celestial Canada, a leading organic and natural products company, was appointed president and CEO of The Supreme Cannabis Co. in Toronto. Goldenberg succeeds interim President and CEO Colin Moore, who had been at the helm since January. The company credited Moore in a statement for reducing overhead while expanding product offerings. Moore will stay on through July as a director and to support the transition. Goldenberg has also been appointed to Supreme’s board. Goldenberg had served as HainCelestial Canada’s CEO since 2016 and held leadership positions with the company since 2005.

July 2020 | mjbizdaily.com 99

IndustryPlayers | New Hires & Promotions Before that, Goldenberg held senior leadership and marketing roles at other leading Canadian packaged goods companies, including Catelli Foods Corp., Parmalat Canada and Pillsbury Co. She has served on the board of Food & Consumer Products of Canada, the largest CPG industry association, since 2008.

Canopy Growth Exits Two top executives departed Canopy Growth, a global cannabis company based in Smiths Falls, Ontario. Dave Bigioni, chief commercial officer of recreational cannabis, left the Canadian license holder, along with Chief Operating Officer Andre Fernandez. “Both decisions were made mutually,” Jordan Sinclair, vice president of communications, confirmed to Marijuana Business Daily. “Canopy has engaged an executive search firm to fill the roles of COO and CCO to lead the business forward.” Bigioni, who previously served as vice president of marketing and sales at Molson Coors Canada, oversaw a team of roughly 300 people at Canopy. Fernandez joined the company in 2016 and rose to COO, a role in which he was responsible for creating and executing Canopy’s operational strategy.

New Leaders for PharmaCielo PharmaCielo, a cannabis company headquartered in Toronto but primarily active in Colombia, appointed Henning von Koss as president. He has held senior executive roles with chemical/pharmaceutical giant Bayer, large health organizations and manufacturing and fashion retail companies. Claudia Jiménez, a Colombiabased lawyer and general manager of Jiménez & Asociados S.A.S., a private consultancy firm that provides financial and economic

advisory services, joined the board. Jiménez, who also served as ministercounselor for the president of Colombia, ambassador in Switzerland and Liechtenstein, executive director of the Mining Colombian Association (SMGE) and professor at the Universidad Externado de Colombia, where she taught economic law, will serve on PharmaCielo’s audit, nominating and corporate governance committees.

the Mississauga Halton Local Health Integration Network and Community Care and Access Centre, served as executive director of the Dental Industry Association of Canada and as senior vice president at Genworth Financial and Intact Financial as well as vice president of Aviva Canada, Allianz Insurance Co. of Canada and Teva Pharmaceuticals. Washer served until recently as the president of Charles River Laboratories, a leading contract research organization near Montreal. It directly supported the development of 85% of drugs approved by the U.S. Food and Drug Administration in 2019.

Plant Wellness Company Expands Commercial Team  Colorado Hemp Firm Adds to Leadership Team Functional Remedies, a hemp oil and hemp product company in Superior, Colorado, appointed Asa Waldstein senior vice president of operations. Waldstein will oversee inventory control, contract manufacturers, extraction, manufacturing and planning on behalf of Functional Remedies. Previously, Waldstein was vice president of operations and regulatory affairs at Advanced Extraction and chief operating officer at Quicksilver Scientific. Waldstein is currently head of the cannabis committee for the American Herbal Products Association and a member of the American Herbalist Guild.

Aleafia Gets New Independent Directors Aleafia Health, a license holder headquartered in Toronto, appointed two new independent directors to its board, Rhonda Lawson and Glenn Washer. Lawson has been a board member at health-care organizations such as

100 Marijuana Business Magazine | July 2020

Marrone Bio Innovations, a Nasdaq-listed company from Davis, California, specializing in sustainable bioprotection and plant-health solutions, added Tim Knight, senior director of sales and account management, and Angela Keyser, senior strategic marketing communications manager, to the North American commercial team. Knight and Keyser join MBI as it experiences double-digit growth and enters into the bio-nutrient market. Knight most recently was U.S. general manager for Acadian Plant Health, a biotech manufacturer of agriculture solutions, and has also held sales leadership roles with Purfresh and BASF Corp. Keyser was formerly the vice president of marketing and communications for High Quality Organics, a global organic ingredients company, and also held marketing and public relations leadership positions at the Iowa Soybean Association, the Wisconsin Potato and Vegetable Growers Association and the Wisconsin Department of Agriculture, Trade and Consumer Protection.

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IndustryPlayers | New Hires & Promotions second vice chair. Bachtell replaces Acreage Holdings CEO Kevin Murphy as chair.

FDA Vet, State AG Join National Hemp Board

 California Lab Gets New CEO CannaSafe, an ISO-accredited cannabis testing laboratory based in Van Nuys, California, appointed former president Aaron Riley as CEO. Riley had served as CannaSafe president since 2016.

Simon Out, Horvath in at High Times Former Overstock.com CEO Stormy Simon, who took over as CEO of High Times Holding Corp. in January, stepped down from the post in early May. She was replaced by Peter Horvath, an American Eagle Outfitters and Victoria’s Secret executive who most recently ran Ohio-based cannabis retailer Green Growth Brands. Horvath resigned that post in March after a turbulent few months that included the company jettisoning its CBD lines. The company filed for bankruptcy in May. Horvath is High Times’ third CEO in a little more than a year, including Kraig Fox, who departed the company in December after nine months in the role. Horvath arrives at High Times amid the company’s scramble to attract investors as part of a Regulation A public stock offering.

National Cannabis Roundtable Changes Leadership The National Cannabis Roundtable appointed Charlie Bachtell, CEO and co-founder of Cresco Labs, as chair, and Kim Rivers, CEO of Trulieve, as

The U.S. Hemp Authority Board, a self-regulating organization, added former Arkansas Attorney General Dustin McDaniel and former U.S. Food and Drug Administration official Larisa Pavlick to its board. Pavlick currently serves as vice president of global quality and compliance for the United Natural Products Alliance, which represents the dietary supplement industry. While at the FDA’s Denver District Office, she worked as a consumer safety officer and investigator. McDaniel was an elected member of the Arkansas House of Representatives. During his first two-year term, which began in 2005, he was elected state attorney general.

 DEA Gets New Acting Administrator Attorney General William Barr appointed Timothy Shea as acting administrator of the U.S. Drug Enforcement Administration. Since February 2020, Shea served as interim U.S. attorney for the District of Columbia, the largest U.S. attorney’s office in the country, responsible for the prosecution of both federal and local crimes in the district. He also served on the Attorney General’s Advisory Committee. Shea served as associate deputy

102 Marijuana Business Magazine | July 2020

attorney general from 1990 to 1992 and as counselor to the attorney general since 2019. In both roles, he advised the attorney general on law-enforcement operations, criminal-justice policy and management issues affecting the department. From 1992 to 1997, Shea served as an assistant U.S. attorney in the eastern district of Virginia. Shea served as chief of the public protection bureau in the Massachusetts Attorney General’s Office and also was chief counsel and staff director of the U.S. Senate Permanent Subcommittee on Investigations and on the U.S. House Appropriations Committee professional staff under former U.S. Rep. Silvio O. Conte. Shea also spent time in private practice at an international law firm.

 Attorney Joins Pennsylvania Hemp Committee EmmaRose Boyle, an attorney with Barley Snyder, a Pennsylvania law firm with more than 100 lawyers, has been appointed to the Hemp Industrial Steering Committee, which was formed through cooperation between the Pennsylvania Department of Agriculture and Team PA Foundation. The committee is an advisory body to the department and to the industry in Pennsylvania. Boyle is co-chair of the steering committee’s policy and regulation subcommittee. In her law practice, she has been counseling clients in the booming hemp industry to track and navigate its emerging laws and regulations, including compliance and risk management. Hired or promoted someone for a senior-level position? Send a news release or general information to omars@mjbizdaily.com.

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QuestionoftheMonth | Concentrate Promotions By Omar Sacirbey

ach month we survey a group of cannabis executives and ask them an industry-related question. We welcome your suggestions for topics. Email us at magazine@mjbizdaily.com. Since National Dab Day, an unofficial marijuana holiday celebrating concentrates, is July 10, we asked executives to tell us if their companies experience increasing sales around that date and what their business does to promote concentrates for Dab Day.

What do e your bus s in do to pro ess mote concent rates for Nationa l Dab Da y?

Brad Davis

Chief Operating Officer, Lighthouse, dispensaries in Coachella and Palm Springs, California At Lighthouse, we will have a promotional focus the week leading up to 7/10. The dab consumer is a critical market for us, especially in our Coachella location. Our plans include offering specials on shatter and concentrates in conjunction with our key brand partners in the category. We will be targeting the younger “heavy smoker” consumer with these specials in a custom, direct-to-consumer text marketing campaign through the Springbig platform.

Mike Bibbey

Vice president of marketing, Ethos, dispensaries in Pennsylvania and opening soon in Maryland and Massachusetts We expect some increase in sales approaching July 10 but don’t expect it to rival April 20 yet. With growing awareness, this year provides a great opportunity to provide information and education about concentrates. We find that a large portion of our customers know the term “concentrates” but are not familiar with the variety of products that are available and the different ways to consume them. Many consumers are frankly intimidated or scared by the category. We hope to use the awareness of 7/10 to help consumers learn all about sugar, wax, shatter, sauce and … have a much better understanding of the variety of forms and effects.

Sam Dorf

Founder and chief growth officer, Verano, multistate operator headquartered in Chicago While 7/10 doesn’t have the level of widespread awareness and engagement that 4/20 does, it’s still considered a significant event, specifically within medical cannabis communities. We generally see an uptick around 7/10 and find many patients taking advantage of concentrate-centered promotions like bundles.

104 Marijuana Business Magazine | July 2020

3K-R

10K

MarketAtAGlance | Alaska In January, Alaska became the first state to approve licenses for on-site consumption. The first licenses were issued in Fairbanks and Ketchikan. Voters in Anchorage—the state’s largest city—overwhelmingly rejected social consumption, leaving the practice outside of ready reach for many residents and tourists. Allowing on-site consumption is expected to provide a boost to tourist-centric Alaskan communities where it is permitted, but with only two licenses issued, it is unknown whether this change will have a significant effect on the overall industry. In response to the COVID-19 pandemic, Alaska implemented emergency rules allowing for drive-thru and curbside pickup of marijuana products. While the temporary measure is set to expire Aug. 14, it can be made permanent by a vote of the Marijuana Control Board. The board already repealed an emergency declaration expanding how cannabis can be transported. – Jenel Stelton-Holtmeier

Main measures

State tax requirements

Measure 2 (2014)

Alaska’s taxes are based on product weight rather than sales value.

Type of business

Application fees

License fees

Retail stores

$1,000 (new); $600 (renewal)

$5,000 (new); $7,000 (renewal)

On-site consumption endorsement (for retailers)

$1,000 (new); $600 (renewal)

$2,000

Immature/ abnormal flower: $25 per ounce

Cultivators - standard

$1,000 (new); $600 (renewal)

$5,000 (new); $7,000 (renewal)

Trim: $15 per ounce

Cultivators - limited

$1,000 (new); $600 (renewal)

$1,000 (new); $1,400 (renewal)

Manufacturers

$1,000 (new); $600 (renewal)

$5,000 (new); $7,000 (renewal)

Concentrate manufacturers

$1,000 (new); $600 (renewal)

$1,000 (new); $2,000 (renewal)

Testing labs

$1,000 (new); $600 (renewal)

$1,000 (new); $2,000 (renewal)

Mature flower: $50 per ounce

Clones: $1 per clone

106 Marijuana Business Magazine | July 2020

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