Ep 326 – How Contract Manufacturers Can Scale Your Cannabis Product

alex rowland newtropic

Is it better to produce your own cannabis products? Or outsource to expert manufacturers while you focus on your brand? Here to tell us is Alex Rowland, CEO of NewTropic.

Learn more at https://www.newtropic.com 

Key Takeaways:

[00:51] An inside look at NewTropic, a leading cannabis manufacturer based in Santa Rosa, California

[1:18] Alex’s background in cannabis and how he came to start NewTropic

[5:56] Examples of NewTopic’s average clientele – particularly unlicensed brands looking to overcome California’s strict regulatory hurdles 

[7:47] How NewTropic helps relieve two of the biggest pain points for cannabis companies: financial resources and compliance

[17:05] Why removing the regulatory overhead of fulfillment allows companies to focus their attention on core competencies

[18:45] NewTropic’s extensive onboarding process and how the company’s team works to ensure all your needs are met as a client

[20:30] Alex’s plans to expand NewTropic across the US

[25:21] The requirements a company needs to meet before working with NewTropic

[30:16] Alex’s advice to new entrepreneurs on how to develop a successful business plan and pitch to investors

[33:11] Alex’s thoughts on the federal rescheduling of cannabis and where he sees the industry heading in the next few years

Click Here to Read Full Transcript

Matthew Kind: Hi. I'm Matthew Kind. Every Monday look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's C-A-N-N-A insider dot com. Now here's your program. Should you be producing your own cannabis product or outsourcing that to expert contract manufacturers as you focus on your brand? Who'll help us answer that question is Alex Rowland of NewTropic. Alex, welcome to CannaInsider.

Alex Rowland: Thank you. I appreciate it.

Matthew: Give us a sense of geography. Where are you in the world today?

Alex: I'm actually in Santa Rosa right now. Santa Rosa, California is about an hour North of San Francisco and it's where we have our facilities.

Matthew: What is NewTropic on a high level?

Alex: NewTropic is a contract manufacturer for cannabis products. What that means is brands, specifically cannabis brands in California come to us and engage with us to manufacture products on their behalf. This includes everything from pre-rolls, to package flower, to concentrates, to vape carts, topicals, tinctures, edibles, beverages. You name it, we're making it.

Matthew: To give us a little detail about your background and journey and how you got to this point in setting up NewTropic.

Alex: I appreciate it. It's actually rather a Securitas route. I actually came out of tech. I've been starting tech companies since the mid-1990s back in 1995. Actually, it was the first internet company I started and I've been involved in those tech companies out in the East coast until 2002 and then moved out to California. Most of those were enterprise software. Most recently in media we actually start a business back in 2009. That wound up in 2013, getting to number eight on the Inc. 5000 fastest growing businesses.

I've been around a lot of fast-growing tech companies, but I've been looking at cannabis really for probably 20 years as a market segment I thought would be very interesting to get into, but it wasn't until 2012 when Colorado and Washington was moving towards legalization. Then ultimately in 2015, when California started taking the same steps for the passage of MAUCRSA.

To me, all these markets were interesting, but they were simply that a curiosity until you have some regulatory framework to build a business model around. Once that happened in 2015, I decided to jump into the space. I was still working in tech so we sold off some of the companies we had in the space, the Canadian company. I went on a walkabout as I'd call it. I spent really the last half of 2015 almost all of 2016 driving up and down the state of California talking to operators, regulators, going to see dispensaries, grow operations, kitchens. Really talking to anyone who would talk to me giving us business. Trying to get an understanding as to what exactly was going on in the space and where I thought the business opportunity was. Really the net culmination for that was by the end of 2016. It was fairly apparent to me that manufacturing was a big weakness in the space and so we need to focus our attention on.

Matthew: Alex, you did all this due diligence with driving around California talking to operators. What was your key insights you had when you were doing that?

Alex: I think it was fairly apparent to me that regulators were going to focus on manufacturing. The regulators are really there primarily to ensure consumer safety when you launch new products like this new categories. That was going to be clear that cannabis was obviously [unintelligible [00:04:00] had a great deal of stigma and I think regulators were especially concerned about, so consumer safety was going to be paramount along with that. Obviously, tax collection is probably their second highest priority.

I think what we realized is that while there were a lot of people cultivating cannabis and a lot of people actually at that point in time even retailing it, the middle of the supply chain was radically underserved. The way it was really traditionally is most cannabis was flower and it was farms would walk into a dispensary with literally pounds of flower in Turkey bags and would sell directly to dispensary who would then go ahead and segment it out to consumers.

That was changing dramatically. All flower products would have to be pre-packaged and certified as safe by regulators, but B there was a proliferation of these new products coming out concentrates, topicals, tinctures, all these infused products that were going to require manufacturing expertise. The state of the art at that point in time, it was literally people's private kitchens, a converted garage, a barn here and there. It was literally a joke and we knew that given the regulatory scrutiny and the importance of delivering a high-quality consistent product nor to build brands that manufacturing is going to be the fulcrum of the market, and there's just nothing there.

We looked at that and said, initially we were going to go ahead and make many factoring expertise a core part of our business model. It became fairly apparent, I think early on back in early 2017, that this was a function that we were going to have to provide for other brands because most people were just not doing it well. I think that was really what we came to that conclusion in late 2016 and really said about the goal of producing or developing a very scaled high-quality manufacturing solution that all brands could share.

Matthew: Do you have an example of a NewTropic client and how they partner with you?

Alex: Yes. I think one of the interesting cases actually because I break it up into distinct quadrants, the clients what we really specialize in are unlicensed brands. Brands who are IP licensing organizations, these are companies who have figured out product-market fit. They've formulated some product, design the packaging, but now they actually need to go about executing on that. If you look at California, like most of the states there's a fairly rigorous, rigorous regulatory set of hurdles you have to overcome to get licensed and operating in the state.

Most brands right now are not going through that process. Certainly in the future not going to go through that process of building their own facilities. These are unlicensed brands and these are brands that are either pure startups and they've raised a bunch of capital or they might even be licensed brands and other states they're looking to get into the California market or they were in the old medical prop 215 market. They're trying to get back up and running.

There's a whole bunch of different scenarios, but generally speaking, the typical client is unlicensed, but they have either sales velocity already in the marketplace either through some other contract manufacturer or like in the case of [unintelligible 00:07:12] they had their own manufacturing facility. They're looking to divest themselves of that asset and move to this asset light model, but that is really typical. It's someone who is saying, "We're going to focus on sales and marketing and building demand velocity, retail channel. We want you guys to focus all the logistics around making sure our supply chain is able to scale to meet our demand, able to deliver products reliably at the quality that our clients would expect." That is really a division of labor. It's unlicensed brands.

Matthew: What are the clients come back in, they tell you is like they identify as their biggest one or two benefits? You have a lot of benefits there, but what is the thing that their biggest pain point or opportunity that you help them with?

Alex: I think it's financial resources and focused. I put those two at the top of the list. What we hear a lot is manufacturing compliant product in cannabis is enormously challenging. We still, we've been at this now for a solid year. We still understand and go through the pain and suffering of delivering compliant product in the marketplace to our clients exacting specifications and our level of quality that we require out of our facilities. That's enormously challenging to do.

What winds up happening is when you're a brand and you're trying to manage that supply chain, it's very difficult to focus on selling. Most of what you want and focusing on are supply chain logistics and how you actually fill those shelves. We allow brands to really get back to focusing on building that demand at the retail channel and let us focus on those logistics.

The second thing is something that we've seen over and over again with brands is lack of financial resources leads to gaps in their supply chain. What I mean by this is we've seen this over and over again, a brand will launch into the market, they'll do a great job of selling, they start to get some scale, and then they run into cashflow issues. They can't support buying additional biomass or packaging or whatever the case may be to refresh their inventory levels. Collections takes longer than they think to happen and they start to run into gaps financially and that leads to gaps in delivery to dispensaries.

I think as anyone can tell you in the market once you accept an order from a dispensary and you're unable to follow up that order with consistent delivery, the dispensary tends to drop you. Selling back into that dispensary is 10 times harder than selling in the first time. These brands going to come up great velocity at retail they have supply problems. Those retailers drop them and they disappear within months.

Matthew: It makes a lot of sense because people want it into a retail environment dispensary. They like a product and they get this totally disappointed when it's not there and these dispensers are not in the business of disappointing customers, so they want something consistent even if it's not an A+ in their mind, they say it's a B+, but we can always get it. I totally understand what you're saying there. How big a problem is this? You're obviously you sound busy, you have clients, but how many cannabis product companies are suffering from some of these issues you described?

Alex: I would say almost all of them. The funny thing is I think there's rare exceptions to this, but if you look at the vast majority of brands in the marketplace, there's a few that stand out that have stood the test of time. Mostly that's because they've gotten a robust supply chain in place and managed to stay on store shelves. That's about yes, building a brand and recognition with the consumers such that they're looking for that product but a lot of what allows brands to remain relevant and sticky is the ability to actually get their supply chain right and consistently deliver a broad range of products into the retail outlets.

That is a very rare bird right now. There's not many brands- even some brands that were very successful back in the prop 2015 days, before a lot of the testing requirements and regulatory hurdles were erected, they could manage their supply chain. They had enough cash and wherewithal to make it happen but these new regulations have really made execution that much more complicated and a lot of brands that were very successful have not been as successful now in this new market.

It's a rare exception, but we've got a line out the door. We started onboarding clients back in January, started shipping first product in March, and by May, it was pretty clear that we had essentially maxed out all of our processing cycles. We're still in a position right now where the 14, 15 clients or so that we onboarded, we're only able to execute on about 40% or 50% of their current order volume because we're just constrained by the capacity of our facility. We're doing a lot to help resolve that problem, but I don't see any shortage of demand right now.

Matthew: Are you going to build a second facility or expand your existing facility or go to Southern California too, or what is that going to look like?

Alex: All of the above. We've actually already expanded by adding a second facility so we actually have two facilities now in the Santa Rosa area. We have a third under contract that we're starting construction on in December. We have another facility in Santa Rosa that we're putting an offer in on in the next few days and a sixth facility down in Southern California in downtown LA that we're looking to put an offer in on before the end of the year.

Matthew: You mentioned Los Angeles, is this an opportunity since COVID-19 is still a thing, there's probably in the commercial real estate space some softness which translates into an opportunity for you, would you say that's accurate? Could you describe that a little bit?

Alex: It's actually commercial space is different than industrial space. What we're seeing is there's a lot of office space freeing up, but industrial space is still trading at a premium. This is because if you really look at what's going on in the broader economy, more and more people- people are still buying things, but they tend to be buying it more on places like Amazon, and they're going directly out to retailers.

What's that leading to is more and more of this industrial distribution space is trading at a premium, whereas a lot of retail and commercial space is going vacant. The facilities we tend to focus on are still industrial warehouses and distribution facilities so that market is still red hot.

Matthew: Sometimes building a manufacturing facility and operations, people bailed-out or companies bailed out, operations that are too small or the opposite problem, it's too big. Can you talk about finding that sweet spot there and how you look at that?

Alex: This is part of the reason why we focused on our specific model, but we recognized very early on if you're going to be a brand and you're going to own your own facilities to manufacture, there's this very difficult decision you face at the beginning. Either A, do we go conservative and build a very small facility to keep our capital investment low and to keep our overhead low and the expectation that we're going to grow more slowly.

The problem with that obviously is that if you're able to get a lot of sales done, [unintelligible 00:14:51] A, each of the unit you produce is more expensive because of everything's done manually, you don't have a lot of automation or mechanization in your facility, and B you're just tapped in terms of the total amount of product you can push out of a building. The other choice is you go ahead and get very aggressive and you invest substantial amounts of capital into these facilities and you essentially overbuild assuming that you'll be able to sell off that capacity through product sales fairly quickly.

You carry a lot of fixed overhead on a per-unit basis, but you can't make those units more expensive, but you're assuming over time that your sales will catch up and put you in a position where you're very cost-competitive. Neither one of these decisions is very palatable and I think it's part of the reason why more and more brands as they're getting into the market now are not looking to do either one of those things. They're looking to avoid that question entirely and just look to variablize all those fixed costs with a provider like us.

I think it's very, very difficult and what you're seeing is there's a lot of brands in California who overbuilt. They got easy to capital back in 2017 and 2018, they massively overbuilt their facilities. What they're doing is they're doing both. They have their own brands, and also moonlighting and selling excess operating capacity to third party brands. We don't think that's a great solution either because you're naturally conflicted. You're enabling your competitive products through your manufacturing capacity and it's not really your expertise, your expertise should be around building and launching your own brands on your own platform.

I feel like that there's all these bad decisions that have to be made given all those criteria and that's what we try to avoid. As we want a big centralized manufacturing, we think it's a much more efficient way to build and scale a brand to variabilize all that fixed costs on a per-unit basis, predictable unit margins, but also have a massive amount of capacity such that you can drive unit cost into the ground as fast as possible.

We don't want to compete with our clients if we're launching our own products, that would create a conflict with those brands. Every day we get up, our focus should be on how do we make our brands more successful so we make the NewTropic facilities more successful and that's how we've gone about it.

Matthew: Sacramento loves to make regulations and laws and so forth, and you have to comply with those. Can you give us a sense of what some of those are and how you take those off the plate of your clients?

Alex: Well, first of all, all of the regulatory overhead of handling fulfillment is now remote. A brand essentially sits entirely outside of the supply chain. Their job is to go to retailers and delivery services to sell their brand and to essentially open up those doors and get those retailers ordering products from us and then we go ahead and fill those orders. Everything from procuring the initial biomass to testing that material to bring it into the facility, processing it, extracting if necessary, packaging it, retesting it, hoarding it, or dating delivery to the retail channel through a fulfillment agent, all of that is handled by NewTropic. Essentially, the brand gets to avoid all of those regulations.

Matthew: That's great. Do you have a lab right nearby that does the testing quickly?

Alex: Given our volumes, we work with multiple different labs. Sometimes our brand partners have specific labs that they've got a good relationship with, that they bring to the table. Oftentimes we work with labs that are close physically to us and have more frequent pickup times. Sometimes it's a price point consideration. It really depends, but we've got probably seven or eight labs at this point in time that we're working with on a fairly consistent basis.

Matthew: Is there a single point of contact once you're onboarded? Do you work with a project manager or as an account executive or do you have software as the primary interface with NewTropic? What does that look like once you come on board?

Alex: I would say that in general, working with us is a very white-glove experience. There's a whole team that works with the client upfront. First of all, to vet the clients and make sure that they're going to be a good fit for our business model and that we believe that they've got the financial resources and the business acumen and the sales capacity to scale our brand within our platform.

It's a fairly lengthy process of vetting the clients and then onboarding that client and making sure all of the components of that product from packaging to design, all of those things are plugged into our model and we understand exactly what the supply chain looks like. That's really a three to four-month process. Once you're up and running, you work directly with an account representative. We're in the process right now of working to provide an online interface that'll help our clients track product as it moves through our facilities. Generally speaking, right now that is one or two different account reps that work on a day-to-day basis with you. 

Matthew: Why focus exclusively on California?

Alex: From a regulatory standpoint, we're forbidden exporting product out of the state. If we're going to go ahead and start supplying Nevada or Oregon or someplace even like Massachusetts or New York, we have to build facilities in those markets to supply to those markets. We are driven to this decision from a regulatory team.

Matthew: Any plans to move outside of California and expand market or not right now?

Alex: No, 100%. We believe that ultimately what is going to be most valuable for our clients is for us to have facilities in every single adult-use market, such that you can work with us and we're going to share product reliability and consistency in every market in which you want to operate. Our goal is first we're looking to expand into Massachusetts. We're down the path on looking at a facility to get that up and running in that market and that'll be our first foray into the East Coast. We think New Jersey is obviously a very interesting market, Pennsylvania, Florida, Michigan, but at the end of the day a big chunk of what we are going to specialize in is not just the competency of producing high-quality product in our facilities, but it's also developing new facilities and get us facilities up and running in new regulatory environments.

Matthew: What about a potential client that says, "Hey, how can Alex and his team really understand the nuances of my business?" We look for a certain terpene profile or this or that and they can't do it as well as us. You probably see that type of thing. How do you help them get their arms around breaking down how the whole operation works?

Alex: I'd say in general, a lot of clients come in feeling like they've got a secret sauce and that their products is completely unique in the marketplace. I think we value and respect that IP. A big chunk of what we feel like our advantages over other manufacturers who are also brands in the market is you can feel very safe with your IP here. We go through the entire process where brands are asked to identify specific steps in their process that they believe are proprietary. We vet that process and once we essentially segment off that component of the supply chain that is proprietor the brands, we've got a whole mechanism or a whole protocol it gets implemented to make sure that we're protecting that IP from other brands that we work with.

That is something that I don't think you're going to see when you've got another brand you're working with and you're buying their excess capacity that they've got competing products directly in the marketplace. I don't think there's any way a brand could feel comfortable that IP is safe. I think that's true. I think brands are getting more successful at developing innovative delivery systems, innovative formulations that are unique to the marketplace. It's our job to protect that IP.

Matthew: There's a lot less upfront costs because there's no capital outlay for buildings and staff and so forth for the operations since you're handling that. That frees up time to allow your clients to focus on their core competency and for your successful clients that you see like, "Hey, this partnership's working out really well." What do they consider the core competency to be? Is it back to that? It's like, we know we're a brand and I'm a sales and marketing company. Is that really what it boils down to?

Alex: I think that's it. I think it's enabling the brand to focus on what is product-market fit because all brands, I think they'll start out with a specific product, but almost certainly within months or maximum years, they're looking at expanding the scope of their product mix to be able to boost the amount of revenue they can generate from each of the retail outlets that they've got access to. That means new products development. I think that's a process that almost every brands goes through and that's part of I think the magic of working on this platform is launching those new products is vastly more cost-effective. They're able to harness this customer data and having this direct communication with the retailer to start to look at if we're hitting this specific demographic what are other products can we add to our roster?

They're going to hit that same demographic effectively and then they can launch those new SKUs on our platform relatively trivial or at least vastly easier than if they own their own manufacturing system or they're looking to go ahead and outsource that with a brand new partner. I think the focus that brand should be on understanding product-market fit. Then once those products are developed and ready to launch, build a sales velocity and again, being able to rely on us to make sure that we can scale up to meet that sales velocity is absolutely critical and a big chunk of the reason why we think we're so valuable.

Matthew: You mentioned a little bit about how you vet clients before they come on board. They need business acumen, they need product-market fit. They probably need a certain amount of capital to know that they're in the game and can can partner with you. What else describes the ideal clients for people that are listening and saying, "Hey, maybe I want to work with NewTropic or my business would be a good fit." How can you help them get an idea if they are? 

Alex: I would say the number one thing we look for is natural sales talent and relationships in the business where we've had I think a great deal of success or with folks that have some history in cannabis. They have tight relationships with retailers already and they've demonstrated an ability to build sales velocity with those retailers in the past. That is of critical importance to us. I can't tell you the number of times we interact with partners that they think they've got a unique product offering or they've got a brand name or a celebrity name behind them and they think that's going to be sufficient to really be successful in California.

When I'd say that it's really about on the ground execution at the retail channel, working with those retailers, understanding what their objectives are, helping to meet those objectives, and constantly evolving their product offering to meet evolving consumer demands. This is not something I think it's viable in the short term potentially to outsource some sales just to get things kick-started. At the end of the day, brands have to be committed to putting resources on the ground the state to actually execute around building sales velocity.

Matthew: Now, I want to get an idea of the unit economics here. Is there a successful client that you don't have to mention their name, but you could maybe mention what their costs are and what they sell for in retail so they can get an idea of what a profit margin that's realistic might look like?

Alex: In general, I think a good way to look at this is and I'll just say, let's say you're trying to hit a $20 wholesale price for some SKU. What we aim at is a situation in which that products we're going to spend somewhere around 10% of that on third-party logistics fulfillment, basically getting that product from our warehouse onto the store shelf. Again, not the sales function, but just the actual mechanics of getting that product on that store shelf is about 10%.

Generally speaking, our cost of actually making it a $20 wholesale products is going to be about $10. There's some products like edibles that that might be more like $6 to $8. There are other products that might be $11 or $12, but across the portfolio you're looking at somewhere around 50% of wholesale toss is the actual cost of producing that item. What you're left with there is 10% is going to fulfillment and 50% to the raw cogs of producing that product. You're winding up with somewhere around a cumulative margin of 40%.

Generally speaking, our brands are going to wind up getting $4 of that and rating at $4 or about 20% of the wholesale price. That's I think a good way to look at it where there's a lot of this in an overhead generally in running our business. There's certainly a lot of sales and marketing to be done with a brand. We want to give them really the power necessary to build successful brands that can scale. We look at that as a fair distribution of the proceeds out of each unit.

Matthew: If you were just talking with maybe somebody that was starting out in the industry, you're given some really great ideas here to make your new brand successful too even if they're not ready to partner with NewTropics. If you let's say you have a new brand it's still in your mind, it sounds like you need to raise capital or have capital yourself. You definitely need the relationships with all the retailers and understand how they think. It's not just the relationship, but understanding how to create a win-win and then you need to have product-market fit. If someone comes to you with those three things you're like, wow, you're 80% of the way there or do you feel like add one or two things more?

Alex: I think we want to make sure the product is fully baked. We are not a product development shop. By the time the product comes to us, we're about operating scale not about product development. These products have to be fully formulated and ready for us. The packaging needs to be designed. We do tend to work with brands to make sure their packaging works better within our automation systems, so we can drop unit cost down. Generally speaking, the product should also be there. 

Matthew: When you're looking at business plans then, there is probably a few things that you touched upon this year, but is there anything that a business, someone is working on a business plan now should make sure they have when they're creating their cannabis business plan, when they're going to pitch investors, like what do you think a lot of people leave off? Because I want to help the businesses that are still early on, but might want to partner with you later on.

Alex: Yes. I think one of the most important things you've got to focus on right now in cannabis is understanding where price points sit in the marketplace for different products. I routinely see people come into the marketplace, they're making assumptions about what they think they can sell a product for and I'd say universally right now, two of the prime drivers that drive purchase decisions by consumers is how much THC am I getting for what price. While that seems a little antithetical to where I think the model will ultimately be, it's almost like walking into a liquor store and saying, "All I'm concerned about is how much liquor am I getting for what price."

I think the market will evolve from that, but that's fundamentally a lot of the purchase decisions are made that way. I think you've got to accept that as reality and regardless of where you're looking to play on the top shelf or middle shelf or bottom shelf in the marketplace, you have to have a very good understanding of where price points sit and what the specifications are the product within that price point you have to hit in order to be successful.

Matthew: You have your finger on the pulse of that, but how do other companies get their finger on the pulse of that? Do they work with like a headset or a BDS analytics or some other consulting company that provides that data?

Alex: I think that's precisely it. I think you can get access to data, that way that can be a little expensive. If you're just going through the initial product development phase, a lot of it's going out to talk to as many different people who are actively selling in a marketplace and retailers to understand where those price points sit. I think you can get a fairly good cross-section if you hit a few retailers in Southern California and a few in Northern California. You're going to get a pretty good sense as to where the retail price sits for these products and you're able to extrapolate from that where the wholesale price has to be in order to get on those shelves.

I think you can collect that data manually, you can collect that data through third parties like salespeople who are actively selling in the marketplace or market research firms like Headset or BDS. We also actually, we have a subscription to Headset. We actually, as we're going through this exercise with all our brand partners, we actually plug in our Headset data about the price points and who the market leaders are and the specific SKU category that a brand is looking to launch and we provide access to that data as part of our integrated onboarding process.

Matthew: How do you feel about one federal rescheduling of cannabis is coming? Do you think it's going to be soon or far or what's your general thought on that?

Alex: I think it's always two to three years away and it will be in two to three years. It's funny. I mean I think it's interesting. When I first got into this back in 2015, I think the- if I had to pick an over-under as to where people thought it would be, most of what I heard is, it was three to five years and here we are five years later and I think we're closer, but I think it's still difficult to predict.

Assuming Biden goes ahead and takes office on the 20th, it seems pretty clear that there's a lot of immense and behind the states act. Now, states doesn't allow for federal descheduling, but it does remove a lot of the impediments that really are, from my perspective, the most substantial headwinds to cannabis being treated as a real business and that is banking restrictions and [unintelligible [00:34:13] which is this onerous tax obligation we as dealers have a schedule one substance have to deal with.

If you can remove [unintelligible 00:34:25] and if you can remove the banking restrictions, part of what the cannabis business suffers from in generally is lack of liquidity in the financial markets to support these businesses. You go into a tech business or pretty much any other type of vertical market, it's federally legal. There are thousands upon thousands, tens of thousands of investors and institutions that can support those organizations in their growth objectives using capital. That is not the case in cannabis. The rates tend to be very predatory. It's a highly liquid market, so the terms can be very, very onerous beyond just the interest rates on [unintelligible [00:35:02] 

There have been cases right back in 2017, 2018 when equity was relatively cheap, that's not the case right now. Part of what we're looking for too, I think is, hopefully passage of states. I think there's broad Republican support in the senate, which is really the only thing that I think can hold it up at this point in time. As long as McConnell listens to his constituents and it can get through the senate, I think there's broad by part of support for the states act and I think that would be a revolution in terms of how we finance and scale these companies.

Matthew: You got a lot of moving parts in the business here in with people, process, technology. How do you see cannabis manufacturing and operations evolving over the next few years?

Alex: I think it's two things. Our number one competitor is the black market. People always talk about who's the company if they're out there. I don't think California can support 20 NewTropics. There's really only one of the company I think right now that is as close to our operating scale and ambition for the market. We compete with the black market, that's our number one competitor and it's the 800-pound gorilla. It's currently occupying probably somewhere around 80% market share in California and we're chipping away at it, but it's going to take some time.

The only way this really works is if we're able to drive the production cost through industrialization, mechanization, automation, every single type of strategy we can use to reduce costs, such that we're able to retail products at somewhere around a 20% or 30% premium over black market prices. I think consumers will pay a premium for legal products, A because it's legal, but B also because it's tested and they know it's safe, but they're not going to pay a 100% premium for that product, which is really what the market's asking them to do right now.

We have to figure out as an industry, how to through these steps and through the industrialization of this crop, drive these prices down to a point where we can compete effectively on price with the black market. Once that happens, I think you're going to see a very, very rapid transition of people over to that. It's going to take some time, but we're getting pretty close.

Matthew: Where are you in the capital-raising process, Alex?

Alex: We've raised, I think actually we just brought in some more cash today, so we're a little over $25 million in cash raised, predominant at this point in time as a debt. There's a whole host of different ways in which you can finance these businesses. Fundamentally, there's a lot of assets that we hold both in terms of equipment and receivables that we can finance against. We've definitely done quite a bit of work around capitalizing the business using debt. Fundamentally, we are looking to go out and raise a much larger chunk of capital where the businesses starting to gets to operating scale. It should be breaking even on an accrual basis here within the next quarter and once we do that, we think that we've demonstrated that the business can be self-sufficient, it ultimately needs capital to grow to meet all this market requirement.

Our goal is, we're continuing to raise a small amount of cash right now to bridge the company, but once we get done with that, we're looking to raise, probably I think our appetite is closer to $20 to $30 million sometime in the first half of next year.

Matthew: Is that open to accredited investors?

Alex: Only. Yes, we are not looking to do a public offering so we can only take a credit investor money.

Matthew: As we close in a couple of minutes, I'll get your contact information for people that are interested in reaching out to you about that if they're accredited. Before we do that, let's go over to the personal development questions. Alex, is there a book that's had a big impact on your life or your way of thinking that you'd like to share?

Alex: Yes, there's really two books. One is a book by Max Tegmark called Our Mathematical Universe, which I think is fascinating. It's a pretty dense read but I think it gives a really good perspective on the way things work at a very fundamental level. The other one is called a Radical Abundance, is a book by Eric Drexler, which talks about massive changes in terms of how the way the world works and what's underlying those trends and what's creating all this radical abundance in the way we get through a day-to-day [unintelligible 00:39:29] Those are two books I think it's been pretty impactful on me.

Matthew: What's the most interesting thing going on in your field besides what you do?

Alex: I think the primary thing that's fascinating for me is the diversity in product delivery systems. If you look at cannabis a decade ago, the only way of really consuming it, except for really fringe activity, it was you were smoking it. You were taking some flower, you were putting into a pipe or you're grinding it up and putting it in a pre-roll and you were inhaling it, and that was pretty much it. You've got an explosion in things like drinks, we're working with a company called CLICK for sublingual delivery. Another company called [unintelligible 00:40:12] who has a very unique way of actually consuming flower but in a healthier faction. There's a whole host of different work going on around the delivery of THC, and these are the cannabinoids and terpenes and flavonoids. That's, I think one of the most interesting things.

Matthew: What's one thought you have that most people would disagree with you on?

Alex: I think it's driven by those books. I think it's about abundance. I think we are entering an age in which exponential growth and a lot of underlying factors are driving us towards a situation of radical abundance. I think that's foundational and I'm also a big believer in minimal income for all people. I think there's a way in which we can solve a lot of our problems by a negative taxation system. I get into lots of debates around inflation with some economic minded people around me, but I think there's something to be said for helping provide a fundamental framework that allows people to operate a minimal income. Really unlaunched, I think a lot of the entrepreneurial aspects of our economy.

Matthew: [laughs] I love this stuff, but you're right. It's not directly cannabis-related, so we'll end it there. Alex, we talked about a lot of things here, so just remind people exactly what kind of products, we talked about what's an ideal client for you, but just remind them of what kind of products you manufacture and can help them with?

Alex: We try to focus on the major product categories in the marketplace, but that's really packaged flower. It's, pre-rolls, it's solvent-based extracts, and the category of the word just now embarking upon right now is ingestibles. We're doing also [unintelligible 00:45:32] is another big chunk of it, but ingestibles. Ingestibles is somewhere around if you include beverages and edibles, it's somewhere around 18% of the marketplace give or take. Beverages are very small category but are growing announced size pace, and I think over the next decade, it could become a much larger part of the overall market. That's the one, call it fifth of the marketplace that we're not currently attaching revenue to and that's what we're going to be adding.

Pretty much, if you look at it this way, you walk into a dispensary, we're going to be manufacturing pretty much any product you see on the shelf. We'll be manufacturing for different brands, but we don't want a single product category to allude our focus.

Matthew: For accredited investors and potential clients, how can they reach out to you to learn more?

Alex: My email address is alex@newtropic N-E-W-T-R-O-P-I-C.com. We have a website, newtropic.com where you can go to the investor section and get access directly to us there, or you can email me or brian@newtropic.com.

Matthew: Alex, thanks so much for coming on the show. We really appreciate it and good luck with everything you're doing.

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Alex: Matt, I really appreciate the time.

Matthew: If you enjoyed the show today, please consider leaving us a review on iTunes, Stitcher, or whatever app you might be using to listen to the show. Every five-star review helps us to bring the best guests to you. Learn more at cannainsider.com/iTunes. What are the five disruptive trends that will impact the cannabis industry in the next five years? Find out with your free report at cannainsider.com/trends. Have a suggestion for an awesome guest on CannaInsider? Simply send us an email at feedback@cannainsider.com. We'd love to hear from you. Please do not take any information from CannaInsider or discuss as medical advice, contact your licensed physician before taking cannabis for using it for medical treatments. Emotional consideration may be provided by select guests, advertisers, or companies featured in CannaInsider.

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