Though the business opportunity is budding — legally, semi-legally and illegally — creating a cannabis brand in an unclear regulatory landscape can be an overwhelming task. During BevNET and NOSH’s second Cannabis Forum for Food & Beverage, held June 14 in New York City, thought leaders and entrepreneurs from across the emerging industry gathered to clear up some of the noise around a handful of the biggest current questions and challenges in the space, from brand building and tax codes to product design and testing.
The forum started with Kristi Knoblich Palmer, co-founder and COO of top tetrahydrocannabinol (THC)-infused food brand Kiva Confections. She said the company aims to fill a need for “professional, approachable [cannabis] edibles,” with products such as gummies, mints and chocolate bars and bites.
“The brownie doesn’t offer any way to break up a consistent dose,” Palmer said. “Most consumers aren’t into that. Some are — but not the consumer of today. When the consumer has control, they’re more likely to have a positive experience.”
Launched in November 2018, Kiva’s Camino gummies line has become California’s third most popular infused gummy and the brand’s best-selling product after just seven months on the market. Palmer said Camino stood out in a crowded category through its use of storytelling; the product is named for California’s historic 600-mile El Camino Real (The Royal Road), with packaging that features colorful landscapes “to transport consumers and give them an immersive experience,” she said. She urged brands to consider emphasizing effect-based benefits, such as ‘focus’ or ‘sleep,’ on product packaging instead of cannabis strains.. At the same time, she advised companies to avoid a “do-it-all” mentality.
“When you’ve saturated your market, move on with caution,” she said.
Before seeing that success, the first step to launching a cannabis product is finding the right supplier, said Teresa Piro, founder and CEO of CAN CAN Cleanse. Speaking on a panel about the state of the cannabis market, she noted how, when formulating Plant Magic, the brand’s line of CBD-infused juices and shots, she spent six months testing CBD suppliers, with lab tests often finding inaccurately reported levels of THC and CBD.
“Being new to the industry was overwhelming and made me a skeptic,” she said.
The importance of ingredients was highlighted by Piro, Nanogen CEO Ben Larson, Botanica co-founder Chris Abbott and Joyce Cenali, Big Rock Partners’ founding partner and COO.
In February, Larson launched Nanogen Labs, which produces nano-emulsions that enhance the water compatibility and bioavailability of cannabinoids.
“If brands aren’t struggling yet they will,” Larson noted. “There’s a lot of fairy dusting going on in the CBD space. After the hype goes away, what’s going to keep a brand moving?”
The threat of big brands, such as The Coca-Cola Company and PepsiCo, entering the CBD market is daunting, but many consumers care about smaller brands, Piro said.
“While it’s kind of scary, it motivates me and excites me to help build out a new category of CBD beverages,” she said.
CBD is not all created equal, said Michael Harlow, partner at accounting firm CohnReznick, noting that the farm bill descheduled hemp as a Schedule I substance — not cannabis.
Harlow reviewed Internal Revenue Service (IRS) tax code section 280E, which applies even to state-legal cannabis businesses, since cannabis is still federally considered a Schedule I substance. The section can also apply to businesses selling products that contain hemp with over 0.3% THC in dry weight or not cultivated by a pilot program licensee. Because of these limitations, according to Harlow, cannabis and hemp startups are unable to deduct seemingly normal business expenses, including wages, salaries and health insurance.
“More money goes out the door than they’re making, and they still have taxable income and do not have money to pay taxes because it’s spent on expenses you can’t deduct,” he said.
Harlow noted that cannabis companies’ interest in professional financial counseling services has increased in the past two years and that the IRS isn’t getting significant revenue from auditing cannabis businesses; there’s no IRS task force to target these businesses, he said. However, he advised business owners to legally separate business entities that sell paraphernalia, such as vape pens, so that standard expenses can be deducted for those operations, which are not subject to Section 280-E.
His other advice? “File your taxes and cross your fingers.”
Alva Mather, partner at global law firm DLA Piper, outlined the current status of cannabis regulation, noting that 33 states and Washington D.C. have legalized some form of the plant. The 2018 farm bill legalized hemp as defined to include any part of the cannabis plant with less than 0.3% THC. But the U.S. Department of Agriculture (USDA) did not create procedures for retail distribution and maintained Food and Drug Administration (FDA)’s jurisdiction to regulate hemp.
The FDA’s current position is that CBD cannot be added to food and drink due to its status as a previously investigated and approved drug. Further guidelines vary state-to-state, leading to “false confidence that it’s really an open market,” Mather said. For example, Colorado’s Department of Public Health & Environment allows parts of the hemp plant, including CBD, to be used in food and drink regardless of the FDA’s stance. California is following the FDA’s guidance, maintaining that CBD cannot be added to food and drink. Meanwhile, states like New York and Washington have seen health departments issue warnings on CBD use in food and drink and threaten further action.
“There’s going to continue to be stepped up enforcement. Most states have not been clear on their position,” Mather said.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) clarified in April that alcoholic beverages containing CBD would not be approved for sale until it is Generally Recognized as Safe (GRAS) certified by the FDA.
Hemp seed, protein powder and oil have been granted GRAS certification and are allowable in food and beverage, but do not provide the same purported benefits of CBD. No health claims can be made anywhere on packaging for CBD products.
For those wary of entering the market, John Kagia, executive vp of industry analytics for New Frontier Data, noted in his Cannabis Consumer Report that the cannabis market is “no longer one size fits all.”
The legal market represents “the tip of a very large iceberg,” he said; there were 263 million cannabis users worldwide last year, according to his report, and large investments, such as Constellation Brands’ $4 billion investment in CanopyGrowth last year, show the market’s great potential.
Cannabis is becoming more socially acceptable and nuanced as forms of adult use evolve, he noted. Relaxation, stress relief and anxiety reduction were cited as the top drivers of cannabis use.
This diversity means an array of opportunities for segment-focused cannabis products and marketing campaigns, Kagia said. According to data from New Frontier, 33% of all consumers (and more than half of all women surveyed) prefer solid edibles over smoking, vaping or other methods of consumption. Frequent alcohol consumers also use cannabis more often, and most deem it safer than alcohol. Kagia noted that CPG brands have a substantial opportunity to transform the industry through non-alcoholic, cannabis-infused beverages.
The appeal of cannabis transfers to the five-star dinner plate, too. The day’s next presentation featured Chef Miguel Trinidad and Doug Cohen, co-founders of 99th Floor, an invite-only New York City supperclub that takes diners from ‘fine dining to high dining’ through a five-course meal of microdosed, cannabis-infused cuisine.
“That’s the goal of the dinners — treating the culinary experience as [equally] important as the consumption experience,” Cohen said.
Trinidad, an executive chef at NYC’s Maharlika and Jeepney, said his job as a chef is to manage THC dosage over the course of the meal; for example, an early dish might have coconut oil to help absorption.
“Every person has the option of pulling back or diving into the rabbit hole,” Trinidad added. “It’s limitless where we can go with it.”
Away from the dinner table and into the world of CPG, endless new products are budding, and timing is everything for intellectual property rights, said patent attorney Larry Sandell of Mei & Mark. Have an idea? Consider filing a provisional patent, he said, which preserves options for 12 months, after which owners can file a regular patent.
While the FDA plans regulations around cannabis products, the agency’s statements are “rapidly changing,” Sandell noted. He advised business owners to expect more legalization in about three years.
The event’s penultimate presentation examined how emerging cannabis entrepreneurs and companies can help create a sustainable and equitable industry for individuals and communities impacted by U.S. drug policy. Willie Mack, co-founder and president of cannabis company Think BIG, and Rashaan Everett, CEO of social equity-focused cannabis brand Good Tree Holdings, discussed how these policies disproportionately impacted certain groups, creating a ripple effect of economic and legal challenges for those affected.
“Communities were completely devastated, [but] only specific communities,” Everett said. “It’s different than doing your part for climate change.”
Of the 8.2 million marijuana arrests between 2001 and 2010, 88% were for marijuana possession.Despite roughly equal usage rates, African-Americans are 3.73 times likelier than whites to be arrested for marijuana, according to the American Civil Liberties Union (ACLU.)
Mack — who launched Think BIG along with CJ Wallace, son of legendary rapper The Notorious B.I.G., and Wallace’s stepfather, Todd Russaw, encouraged entrepreneurs to consider establishing equity programs so incarcerated offenders can be “rewarded in some way.”
“That’s a really good place to start — and do that from a real standpoint of authenticity,” Mack said.
Concluding the event, Michael Hayford, co-founder and CEO of portfolio management company Lighthouse Strategies, explained why beverages provide an “easier transition” for the new cannabis consumer. Hayford’s Two Roots Brewing Company, which sells THC and CBD-infused non-alcoholic beer, leads the category in Nevada’s dispensaries.
Craft brewers can leverage their knowledge base, assets, resources and process into cannabis operations, Hayford said, adding that low-calorie, low-carb, non-alcoholic drinks “represent a normalization of consumption of cannabis: a social platform people can consume,” he said.
The Cannabis Forum for Food and Beverage, presented by BevNET and NOSH, was sponsored by Green Taste, mood33, White Label CBD Company, BevZero, Enthuse Foundation, HerbForce and ZoomEssence.