Rules, Regulations and Quality Control in the Cannabis Industry

September 28, 2022

In this episode of CannaCast, Eric Altstadter, Partner and leader of EisnerAmper’s Cannabis and Hemp Group, speaks with Evan Kolakowski, Director of Regulatory and Quality Assurance at TerrAscend New Jersey, about how TerrAscend New Jersey complies with the rules, regulations and quality control for this budding industry.


Transcript

Eric Altstadter:Thanks for tuning into this episode of CannaCast. I'm your host Eric Altstadter, EisnerAmper's National Cannabis and Hemp Practice Leader. I am joined today by Evan Kolakowski, Director of Regulatory and Quality Assurance at TerrAscend New Jersey.

Evan has been working in the industry for over 11 years doing a variety of projects for some of the biggest names in the industry. TerrAscend is a leading North American cannabis operator and a vertically integrated multi-state operator. TerrAscend's best-in-class cultivation and manufacturing practices yield consistent high-quality cannabis, providing industry leading product selection to both the medical and legal adult use markets.

Evan, thanks for joining me here today.
Evan Kolakowski:Hey Eric, it's nice to be here. Really appreciate you guys having me on.

EA:
Evan, how did you first get involved in this industry?
EK:Around 2010 I saw that New Jersey had just begun to develop their medical cannabis program, so I simply just applied. Nothing magical. Thought it could be interesting. At the time it was out of the Department of Health, not the commission that it is today. So luckily enough I got in at the ground floor and was able to be part of the framework of a brand new government program.

I started from the bottom answering phones, helping patients, caregivers, speaking with physicians. That grew into assisting the department with the development of the state's registration system. I was able to go out personally train law enforcement on recognizing patients. And ultimately, became part of the Regulatory Inspection team where I would conduct state inspections of cultivation and dispensary facilities along with the other inspectors. That's where my interest really sparked.

It was just under five years at New Jersey's Cannabis Program that I left to go into the private cannabis industry. I worked in New York as a stakeholder employee in the operations and opening up a cultivation facility, processing laboratory and three dispensaries across New York state. There, I was able to leverage my experience in regulatory compliance, understanding cannabis startups and inventory systems to help in multiple areas. From there, I went south to Maryland as the compliance manager for a very large and successful medical cannabis greenhouse. We basically started with a hayfield, nothing more. And it quickly became the state-of-the-art greenhouse that it is today that cultivates quality medical cannabis for patients. There, I implement the standard operating procedures, protocols, quality control checks, and ultimately work towards keeping the facility fully compliant with all rules and regulations.

And now, like you said, more than 10 years later, 11 years, I find myself here at TerrAscend.
EA:Tell us a little bit about TerrAscend.
EK:So TerrAscend is a multi-state operator. We have facilities across the nation and Canada that includes New Jersey, Pennsylvania, Maryland and California. Almost all of the facilities are vertically integrated, meaning that we have a grow processor and we have dispensaries. The company really strives to create and maintain a culture that revolves around being collaborative, committed to quality, and focuses on the customers itself. TerrAscend's New Jersey operation is really at the forefront of being obsessed with continuous improvement.

Operations at NJ, were born from a collective of individuals who prioritized efficient processes and quality while utilizing the regulatory environment and resources that we had to create a model for efficacy in the space. I think TerrAscend is a really good example of a company that takes people who not only want the foot in the door, but finds individuals who want to be a part of the trials and tribulations of this industry, and want to make it better because it's a tough climb. And TerrAscend is built upon that model for hard work.
EA:You mentioned TerrAscend has only been around for a couple of years, but how has TerrAscend been able to grow from a startup operation just a few years ago into the multi-state operator it is today?
EK:So I would say that the foundation of TerrAscend's success is really built upon the people that it seeks out. When I first joined the team, it was really at a starting point of what felt like the company's rise to become a real player in the industry. TerrAscend did a nice job of growing its portfolio, of partnering with other cannabis operations and people that were made up of individuals that were very good at what they did in the industry. And they could provide really valuable insights to help the company grow. And everyone was also really passionate. And when you have passionate people combined with other passionate people, it really creates a good harmonious communication system across a company. And that really helped us grow into an effective and efficient company because everybody wanted to be involved with each other and get involved.
EA:Evan, how important is quality control to this industry, and to TerrAscend in particular? And how did TerrAscend go about setting up its current system of quality control?
EK:Yeah, so from the outset, QC built within processes have become one of the most important factors for the company. The QC process design needed to be able to create a traceable system of quality documentation. So in the event of a departure from standard operating procedures, complaint, or an investigation on a specific lot of cannabis product, we would be able to accurately utilize the important factors recorded by production staff and management to identify a potential issue, allowing us to implement a preventative action plan.

Additionally, a good quality control system also creates the ability for us to understand specifics of a procedure like the moisture content of dried flower and when it's ready for market. Or how often and when staff should be physically inspecting the color and consistency of cannabis oil before it gets loaded into a vaporizer cartridge. We also, take those recorded details, compare them and make sure they fall within procedures, adjust if needed, and ensure that the outputs are within predetermined quality limits because we want consistency all the way across the board from seed to sale.

Well, QC also directly ties into working with an independent third-party laboratory. So our company is very thorough with batch testing. And New Jersey just began the allowability for licensees to start working with a third-party independent lab. Previously, from roughly 2010 to 2020, there was only one laboratory across the state. Now, there's multiple and we can use whoever we want, contract with them and then we batch test flower and oil to make sure that it's safe, and efficient and effective for patients. And we do that to provide confidence that our processes are in line with expectations. And that the data from the lab is constantly used to maintain those elements of determination.

Ultimately, these systems are designed so that the end user, such as a patient suffering from a debilitating condition, can get the same medicine every time they show up to a dispensary to purchase their medicine.
EA:Evan, when I buy a Diet Coke here in New York, I'm pretty comfortable that the Diet Coke I buy here is the same Diet Coke I could buy a Texas, or Seattle, or virtually anywhere else.

Now in this industry, because of the federal laws and the lack of being able to transport product across state lines, you really can't do that. But how important in the future is it for a customer to get comfortable the product they're buying in New Jersey would be the same product they are gonna buy in California or anywhere else?
EK:It's a tough one because the industry is still so young and the standards for this sort of thing are still being built. But it's headed in the right direction. And the nation is very fragmented on rules and regulations per state. And even though there might be similarities, the smallest differences in law can create big differences on how cannabis is processed, sold and consumed. So, like you said, we can't ship things across state lines, so we can't just have one large facility in the center that's able to ship out a consistent product to all the states. So we really need to rely on operational consistency through communication and process alignment, which brings its own challenges because we need to make sure that plants grow the same, and create standard packaging and labeling across multiple states in relation with laws. And this comes as a great challenge.

One important thing is knowing who you're buying from. That's a really important aspect. If a consumer really wants to gauge the consistency of their favorite brand across multiple states, some good places to start are to ask questions to your dispensary vendors, your wellness associates. Are the company's cultivation sites across the nation indoor? Are some greenhouse? Maybe they're fully outdoors. Do the regulations not allow us to sell certain products? Are the ingredients the same? Because that's a big factor. Sometimes there are ingredients across borders that are not allowed to be used in some states and then they are allowed to use in other states. So, that'll change the chemical makeup and the formulation of the products creating a non-consistency.
So being able to attain these answers through speaking with people at the dispensers can help you really narrow down of what consistently really is in a federally illegal marketplace. And like I said, it's headed in the right direction, but there's still developments that need to be made to really ensure that companies like TerrAscend, we can create the exact same product across the board. They are very close, but like I said, there are differences because of what we have to do to juggle regulations.
EA:You mentioned some of the differences between rules and regulations for each state. And I guess my question is how different are compliance rules and regulations in each state and how are you able to maintain compliance with those rules and regulations in each state?
EK:So, like I said, every state is different. Sometimes they have identical regulations with each other, which luckily enough for us is a great thing. And obviously, the groundwork for understanding and having compliance in every state really just comes from understanding them. But with understanding the black and white text of the regs comes the subjectivity between yourself and your regulatory agency. So the way that you and I might perceive a regulation may be very different than what our regulatory agency thinks. And they're the ultimate one who decides whether or not how we have to follow it. So one of the best things you can do is get to know the person who is regulating you.

Generally a licensee, like here in New Jersey, you'll be assigned a specific regulator who will learn your processes, your SOPs, ultimately monitor you and your operations from seed to sale. So building a strong relationship with that person is an excellent way for them to help you understand how they interpret the regulations. It's almost a window into their minds. And that aspect won't really make you automatically compliant, but it will help you build a foundation to build your quality management system and structure for processes.
Another important factor of ensuring compliances across multiple states is presence and operational understanding. Now it's hard to be in all places at once, but if you have knowledge of the regulations but you don't have knowledge of how operations work, you can't really provide the support to departments on how to still be able to be efficient while following regulations. So telling somebody they need to follow a rule and then ignoring the metrics of what their production requirements are will only cause issues. And ultimately, staff will just disregard the regulation 'cause they need to stick to the plan and the goals that their boss tells them for what they need to get put out on a certain day.

So understanding the process allows you to intertwine compliance with production. And that kind of ties into having standard operating procedures. That's something we hear all the time. It's peppered in and out of every rule regulation almost in every industry. And it's imperative to have an SOP for every process from cleaning bathrooms to operation of cannabis extraction equipment. Not only does the regulatory agency need to see this, but from a structure standpoint you can validate consistency, evaluate data, detect and resolve issues where there's departures and expectations. And having a strong groundwork for SOPs allows you to take that structure, move it to another state, you tailor fit it to the rules and regulations of that state. You do the work once and then you're able to monitor compliance a lot easier because you have consistency across the board in multiple states.
EA:Evan you mentioned that this is a relatively new industry, which it is. I'm going to ask you to pull out your crystal ball, what are some of the bigger issues you see for this industry going forward?
EK:I think one of the most impactful issues for the cannabis industry right now is probably the 280E tax. And just for some clarity, 280E tax was introduced, I think it was in 1981 after a cocaine trafficker solicited to deduct his business expenses as part of his criminal enterprise. So currently, New Jersey recognizes the 280E as it's found in the internal revenue code, which ultimately prohibits any entity partaking in drug trafficking from deducting their regular business expenses during tax filing. And basically as a cannabis business, we're federally illegal, so technically we're seen as drug traffickers.

So for a non-cannabis business owner, hypothetically speaking, you would normally deduct their cost of goods sold and other normal business expenses from their gross revenue, giving them their taxable income. The tax rate would be applied subtracted from their taxable income, and you would get your take home.

For a cannabis business owner that take home turns into a loss. So the cannabis business owner would deduct their cost of goods sold from their gross revenue and wouldn't be able to deduct their legitimate expenses and be required to calculate that tax based off their entire gross income. If the tax rate is the same as a non-cannabis business owner, they would end up actually owing more money than their net income for that year.

And because of the effects of 280E, it's difficult to reinvest in state priorities. It prevents a cannabis business from investing in new assets, creating jobs for the community, expanding payroll for hardworking individuals and being involved in the community, which is very important nowadays. And it doesn't impact just companies like TerrAscend, but it will equally impact new entrance licensees such as social equity businesses and micro businesses.

So nationwide, there's a big inconsistency in states recognizing the 280E tax. And hopefully the industry expands and we see some decoupling of this tax in other states. I believe Maryland and New York are starting to decouple away from it. And hopefully, New Jersey is close to follow as well as some other states that still recognize it.
EA:Evan, thank you as an account, we thank you for highlighting 280E as an issue going forward. And I was also gonna mention the fact of decoupling. New York has decoupled from 280E, meaning in New York state, you can deduct those expenses to arrive a taxable income. Now the New York tax rate certainly is a lot lower than the federal tax rate, but it's still every little bit helps. You also mentioned New Jersey. I do expect New Jersey to follow suit shortly just because of the competitive landscape. I expect New Jersey to follow suit with decoupling from 280E also in the near future.

What is the future of medicinal cannabis and how important is research and development to the industry?
EK:So I think one of the more important future developments on medical cannabis is that we'll start to see a focus on the actual condition that a person suffers from. So right now you have products that are ratio based or in certain cannabinoid or terpene profiles, and it's dispensed in such ways like 10 to 1, 5 to 1, and that's really the CBD and THC. And there's a general sense of what terpenes like [inaudible 00:13:52] or pinine do.

But the future for patients is gonna be the research on the profiles of the debilitating conditions, and the drug delivery systems that are for those profiles utilizing unique cannabinoids and terpene combinations. So there's over 100 in the plant and over 500 different chemical substances. So there's a lot more than just THC and CBD.

When you go to a dispensary right now, or really any dispensary website across the nation where cannabis is advertised, you generally just get THC and CBD percentages, a lot like an ABV on the side of a bottle of whiskey or something. And as the industry further intertwines with pharmaceutical science and people from that industry, we very well could and, hopefully, start seeing more onsite pharmacists and having products with medical delivery systems like the treatments that are used similarly in the medical field applied to cannabis.
EA:Evan, how important is business insurance to the industry?
EK:It's very important. So, for example, in a vertically integrated license you have a whole ton of moving pieces. And each area needs coverage from potential unexpected and unfortunate events. Cannabis plants, bulk harvested cannabis and cannabis oil are exponentially valuable. And having the correct amount of insurance in the event of a fire, or a catastrophic equipment failure can cover loss if that happens.

Some aspects such as secure transportation are required in a certain amount of automobile liability insurance by state regulations. So you're bound to satisfy the criteria before you can even begin transporting cannabis. But even it's not required by law, attaining the proper liability insurance on all vehicles should be an automatic procedure.

It is important for the cannabis business to have a good sense of production forecasts, canopy estimates, and harvest value just as well as it is important for an insurance company to have a structure to understand the constant advancements in the industry so they can tailor fit a plan to the licensee. Because right now we're seeing vast improvements from year to year in the cannabis industry and there's a lot of adjustments that have to be made to fit those plans, whether it be brand new extraction equipment, automation, how plants are grown, things like that. So I think that really is the importance of insurance in the medicinal cannabis field.
EA:So Evan, now let's get into our last question of the day. With respect to future products, where do you see the industry headed to? Is it beverages, is it edibles, is it flower, is it something else altogether?
EK:Edible and beverage market is definitely gonna have a strong future in cannabis. The foundational basis of cannabis use is generally to either feel better or feel good based on the market for which cannabis is consumed, whether it be alleviating symptoms of a debilitating condition, or simply to relax.

There was a study not too long ago of adults in the US and almost 30% of the respondents of that study who participated reported consuming cannabis in edible form or beverage form. Those forms include things like confections, chocolates, baked goods such as cookies, and beverages such as infused soft drinks. So many patients need to consume cannabis outside of their homes where smoking might not be possible. This makes ingestible cannabis an advantageous route of administration since it can be done without causing potential victimization to the patient themselves.

Secondly, patients suffering from conditions where smoking or vapors might exacerbate their symptoms and cause harm can't really rely on anything but ingestible products. And the extraction of cannabis oils is becoming more technological so you see a lot of pharma individuals using their expertise from the medicine industry and bringing this to cannabis. You combine this with the market demand for cannabis infused cookies and chocolates and you have a safe, and effective and discrete means for consuming edible cannabis. And that's really where I think that the market is going to move towards right now as far as products go.
EA:Well, thanks for joining me here today, Evan. And thanks for listening to CannaCast as part of the EisnerAmper podcast series. Visit eisneramper.com/cannabis for more information and podcasts. Join us for our next CannaCast podcast where we'll discuss other budding issues.

Transcribed by Rev.com

About Eric Altstadter

Eric Altstadter CPA is an Audit Partner and Chair of the firm's Cannabis and Hemp practice with over 30 years of experience working with public companies and privately held businesses


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