Licensing Playing Vital Role in Cannabis Industry

August 9, 2017 (Originally published in LIMA - Inside Licensing)

Is the budding cannabis industry ripe for licensing?

With a growing number of states having legalized marijuana for medical treatment – 29 at last count including the District of Columbia – and  eight states plus the District of Columbia where it has been cleared for recreational use (with California coming on line in 2018), licensing professionals are viewing the cannabis industry as a growth market.

Indeed, North American retail sales of cannabis-based products, including products infused with the drug such as chocolate bars, lozenges, energy drinks and beauty products, are forecast to increase to $20.2 billion in 2021 from $6.7 billion last year, according to Arcview Market Research.

The increasing sales have drawn the attention of celebrities and start-up companies seeking to build brands amid a patchwork of state regulations; since marijuana remains illegal under federal law, companies can’t conduct intrastate business. To expand a brand outside their home state, companies are required to license it to a company in another state.

For example, rapper Snoop Dog’s company is based in California, but he licensed supplier and retailer LivWell to create and sell Leafs by Snoop marijuana and other cannabis products in Colorado. Singer Willie Nelson’s Willie’s Reserve brand of marijuana is processed in Colorado by licensee CMH Brands. And Washington State start-up Zoots International licensed Massachusetts dispensary Sage Enterprises to produce and sell its Zoots line of edible products, including ZootBites caramel expresso brownies and ZootBlast energy drink.

“It is a wide open market out there right now and one of the fastest ways to establish yourself outside of your local market and build a brand is through licensing,” says Zoots’ Patrick Devlin, noting that the licensing agreements are typically 2-3 years contracts carrying mid-single digit percent royalty that may be higher in the case of celebrities.

Yet in building a brand, cannabis companies are faced with the added challenge of not being about to get federal trademark protection, which the U.S. Patent and Trademark Office won’t grant as long as marijuana remains illegal on the federal level. Instead, companies seek separate trademarks in each state where marijuana is legal.

“Brand building in this industry is incredibly important,” says Alison Malsbury, an attorney with the Seattle-based Harris Bricken law firm that has a dedicated cannabis practice. “I have clients that come to me all the time with a business model that is entirely based on marketing a brand, and it’s difficult when you can’t get a federal trademark.”

Yet at least one industry observer questioned the need for celebrity brands in the cannabis business. “The recreational users right now are more after the [high] and whether a certain product carries a certain celebrity brand doesn’t seem to make much difference at this point,” says the industry observer. “These consumers are pretty dedicated to a particular strain and once they have bought into something they are going for that one thing regardless of whose name is on it.

With many federally-regulated banks barred from providing loans or other funding to cannabis businesses, companies are turning to private equity funds, family offices (those operated by wealthy individuals), or state credit unions for funding. Defonce has raised $2 million since its start several years ago including the money needed for a licensing deal with Tommy Chong (of Cheech & Chong fame) and to open a 10,000-square-foot processing facility in Oakland, says CEO Eric Eslao.

Equity firms supplying financial backing include Tuatara Capital, which partnered with Willie Nelson in the launch of Willie’s Reserve, and Privateer, which formed a venture with the Marley family.  Snoop Dog created the Casa Verde Fund to invest in the cannabis business and even before launching his own marijuana brand, developed the www.merryjane.comwebsite for news and information.

The interest is understandable. Pot shops in Washington State have generated more than a $1 billion in sales since cannabis became legal for recreational use in July 2014, generating more than $250 million for state coffers through excise taxes, the Seattle Post-Intelligencer has reported. Ponder, with a single store in Seattle, generates about $250,000 in monthly net revenue, owner John Branch told us.

Yet for all the high-profile celebrities and financial firms investing in the business, it operates under some unusual strictures. In states where recreational use is legal – Washington State, Alaska, California, Colorado, Nevada, Maine, Oregon and Massachusetts – companies are barred by federal law from advertising cannabis on radio, broadcast and cable TV.  Billboard advertising also is illegal in some states. Even social media has proved challenging, since Facebook and others bar the promotion of marijuana. This leaves companies to promote their goods via store-level promotions including marketing materials, in-store demonstrations and pitching their wares to so-called “budtenders” (the marijuana equivalent of bartenders) who can influence their customers’ selections.

“Ideally we would like to touch the customers more, but given the restrictions around marketing and advertising, you have to come up with new ways to crack that nut,” says Todd Kopet, president of LMH Partners, a Zoots licensee in Colorado.  “With consumer surveys being so new in an industry that is still working to capture data and not having a marketing channel, it is hard to figure out how to reach the customer.”

Among recent developments:

Beanstalk, through its Icon Representation Service, is making 10 of its deceased celebrity brands available for licensing of cannabis-related products, according to the company’s Martin Cribbs. So far, the most interest among potential licensees has been in the late movie star Humphrey Bogart and late TV star Farah Fawcett, and some deals are close at hand, but none have been finalized, says Cribbs. Bogart’s potential appeal in the cannabis trade is related to the Fraternity of Man song “Don’t Bogart Me” from the Easy Rider movie soundtrack. “In that situation you are referencing inside knowledge about the industry… that is kind of enticing” for a marijuana brand, says Zoots’ Devlin.

Epic Rights is prepping the Woodstock brand for licensing for cannabis and accessories such as bongs, vaporizers and other products, says Epic’s Lisa Streff. The timing hasn’t been set, but it would likely be in advance of the 2019 commemoration of the 50th anniversary of the Woodstock Festival. Musicians and groups that Epic represents are divided about whether they want to attach their brands to the cannabis industry.  “Some of them are very engaged, but others are more reticent and don’t want their names associated with cannabis, spirits and gambling” — all of which they consider addictive — says Streff. But potential licensees also are not “beating down the doors” yet to get into the business, given the distribution challenges for cannabis, which can’t be sold across state lines.

Defonce Chocolatier, which makes cannabis-infused chocolate bars under its own label, licensed actor Tommy Chong’s Chong’s Choice brand for products that launched late last month in dispensaries in California. The Chong’s Choice bars use slightly less chocolate than the Defonce-branded versions, but are priced at a premium to them given the royalty payments required, says Eslao. “DeFonce is a very niche brand built for the recreational user and it is a new concept of low dose (10 milligrams of THC), high quality chocolate,” says Eslao.  “Chong’s Choice is well known within the medical user base and Tommy is well known within the cannabis culture. A lot of the things we can do with their brand we wouldn’t be able to with Defonce.” Defonce’s chocolate bars are sold through more than 100 dispensaries.

Publicly traded Pineapple Express recently licensed the THC trademark to The Hit Channel (for its thc.com domain name) which is preparing to launch its site as “the ultimate destination for the cannabis industry, combining news, social media and ecommerce into a single platform”; and to Putnam Accessory Group, for fashion accessories. Hit Channel’s license carries guaranteed annual minimums of $800,000 during the first three years of the deal, and $400,000 annually thereafter, Pineapple said in an SEC filing. Pineapple acquired the THC brand in buying THC Industries in February 2016 and has since hired The Sharpe Co. to represent it.

Zoots International, having established its business with edible cannabis, is moving into smoking products including vaporizers and pre-rolled joints. Zoots will test sales of the products in its Washington State home market before moving to making them available to licensees, including Sage in Massachusetts and LMH Partners in Colorado. “We will take our brand and see if we can get a halo effect in something that would be non-traditional for us,” says Devlin. “We will start in Washington State where we have some equity, and demonstrate the products to our licensees who might want to bring them into their states.

In addition to Nelson, Chong and Snoop Dog, Singer Melissa Etheridge and the family of the late reggae singer Bob Marley have made sizeable investments in the cannabis business. Etheridge introduced the Etheridge Farm brand last fall as it licensing local growers to process the cannabis that is being sold through dispensaries in Oakland, San Jose and Santa Cruz, CA. Marley’s estate launched Marley Natural cannabis in Colorado last year with the backing of private equity firm Privateer Holdings, which signed a 30-year licensing agreement with the family. Privateer raised $75 million in 2015 with the backing of Founders Fund, a firm run by billionaire Peter Thiel. Marley’s youngest son, Damian, last year announced a partnership with Ocean Grown Extracts to convert a former California prison into a cannabis growing facility. Damian Marley also developed the Speak Life cannabis brand with Ocean Grown.

Contacts:

Beanstalk, Martin Cribbs, VP Brand Management, 212-303-1139, martin.cribbs@beanstalk.com