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An area of the cannabis marketplace gaining steam in a big way is women’s health. Here to tell us more about it is Cyo Nystrom of Quim, CBD-infused products for vaginal health and sexual wellness.
Learn more at https://itsquim.com/shop/
[00:43] An inside look at Quim, a line of CBD-infused lubricants and everyday proactive vaginal health products
[00:58] Cyo’s background and how she came to start Quim
[10:44] The benefits of cannabis for female vaginal health and sexual wellness
[13:05] How Quim’s cannabis-infused lube increases vasodilation for heightened sensation and pleasure
[15:31] What customers are saying about Quim’s serums and oils
[18:47] How Cyo and her co-founder Rachel Washtien successfully bootstrapped Quim and landed a feature on Viceland
[25:17] Cyo’s plans to expand Quim both across the US and internationally
[30:40] Where Cyo sees the cannabis women’s health space heading over the next 3-5 years
Matthew: 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. One area of the cannabis marketplace gaining steam is women's health. Here to tell us more about it is Cyo Nystrom of Quim. Cyo, welcome to CannaInsider.
Cyo: Thanks so much, Matt. It's great to be here.
Matthew: Give us a sense of geography. Where are you in the world today?
Cyo: Right now I am in an Airbnb in the Berkeley Hills.
Matthew: Okay. What is Quim on a high level?
Cyo: Quim is a self-care line for humans with vaginas and humans without vaginas who love vaginas. We make cannabis-infused vaginal health and wellness products.
Matthew: Cyo, can you share a bit about your background and journey and how you got into the cannabis space and started Quim?
Cyo: Sure thing. There's a few different angles, so I'll try and give the short version. I was raised by a single mom in the Bay Area. I learned from a very young age that my father was incarcerated for non-violent cannabis crimes. Growing up in a pretty affluent area of the Bay Area, that's something I carried with a lot of shame. I went to a private school in Marin County. Definitely was one of the only kids without two parents, and at least to my assumption, definitely felt like the only kid who had a parent in prison.
I carried that with a lot of shame and I started using cannabis recreationally in college and was really excited about cannabis as a recreat-- My first introduction to cannabis was really as a recreational drug. I found that it was creative. It really made music sound better. It made food tastes better. It made conversations more interesting and it didn't have all of the really negative side effects of alcohol.
It really became something that I looked to as a way to unwind or get creative. Then when I graduated from college, I started working in tech sales in San Francisco, selling marketing software to companies like Ulta or Sephora or REI. Meanwhile, California was passing some pretty historic legislation around the cannabis industry, what is now known as the Medical Cannabis Regulation and Safety Act. That essentially took what had been about a 20-year grey market economy, and really was bringing it above board.
It introduced all these different licenses. I saw an opportunity to get involved in the industry, really at its nascent stages, as the regulations were just being made. It was really exciting to me because it still felt like the wild west and I saw an opportunity to get involved. Potentially, not that I single-handedly could correct all the negative impacts of the war on drugs, but potentially, could do something that would, in the future, make it easier for those-- if your parents work in cannabis, that you'll still be able to apply for financial aid when you're going to college or you don't run the risk of losing your parents. I was really excited about that.
Meanwhile, in the background of all of my career path, I had been suffering very intense vaginal health issues since I was about 18 years old. I'd been in about an eight-year UTI yeast infection cycle, and I'm sure we'll get more into that. While I was in college, I started doing research on what are the ingredients I'm using in and around my vagina, and also if I know that I'm predisposed to some of these health issues, how can I proactively care for this part of my body in the same way that we wear sunscreen and we try and stay hydrated and we exercise?
We are now starting to understand as a society, it's a lot more sustainable and a lot more economically feasible to keep your body healthy. What I found is that there wasn't really a lot out there. Then fast forward a few, I started making my own little products that didn't have cannabis in them, and then I started working in the cannabis industry and learning more about how cannabis works as a topical, how the benefits it has for sexual health and feminine wellness. Yes, that's really how Quim began.
Matthew: Okay. Cyo, do you remember the first aha moment when you and your co-founder were like, "Hey, this is it, we've got something here. Let's move forward."?
Cyo: Yes, definitely. I had been making these cannabis-infused oils for probably a couple of years before that aha moment. I had just been making them for myself, putting them in little Mason jars, and really giving them to anyone who would try them. Anytime we had a party or friends over for dinner, they would leave with these little jars of weed loop looking at me like I was a little bit crazy.
Matthew: That's a great party favor, I can adopt that myself.
Cyo: This was many years ago and people were like, "This is what? I put this where?" I had this moment where I was actually visiting one of my best friends in Los Angeles. At this point, I always traveled with it. I left a bottle at her house and I called her. I was like, "Oh, I'm sorry, I'll come pick that up later." She was like, "Actually, it's mine now. You're never getting it back. In fact, I'm going to need some more."
She was like, "You've had these vaginal health problems for so long, but what if this is actually-- you've come up with something that works and you really know a lot about vaginal health and wellness and really products that-- or ingredients that we should stick away from or things that are really helpful." She was like, "What if this is the thing you should be doing?"
I'd always known that I wanted to start my own company. My mom is an entrepreneur and I just had this deep feeling that I wouldn't be fully satisfied until I was at the helm of my own ship. I also understood that I needed a co-founder. I have a lot of really great skills, but there's also a lot of aspects of running a business that I knew that I wouldn't be the strongest at. I'm a deeply collaborative person. I have my best ideas really in conversation.
I'm one of those people who sometimes I don't exactly think before I say something, it's while I'm talking, I'm like, "Oh, I just realized this thing that I couldn't quite formulate on my own, but now that I'm talking to someone, it comes together as a real idea."
I would say that was the first moment. Then not too long after that, an old childhood friend, Rachel Washtien had just gotten back from spending about a year in South America, traveling. She was talking about what she wanted in her next role or her next job or gig. We were at a friend's birthday party up in Sonoma, and she was describing that she really wanted to be-- she wanted ownership over a project from soup to nuts. She wanted to make something with her own two hands, something that she believed in and have ownership over the whole process.
This light bulb just went off and I was like, "Oh, my God, here you are. You're the woman I've been looking for." We talked about it a little bit and then I would say I proposed to her a few weeks later and was like, "I know this is crazy, but we should do this, and I would love to do it with you. Here's what I have so far and here's what I'm good at, but here's what I know that you're good at and I think we could really make this happen." I would say those are the two big moments.
Matthew: It really is like a marriage proposal in many ways. You're dedicating your lives to each other for a huge chunk of time. That's appropriate. Now let's back up a little bit. The name of your company, as we mentioned is Quim, but I understand that word has some Victorian era roots. Can you talk about that?
Cyo: Yes, absolutely. Quim, is a Victorian era word for vagina, vulva. It was used pretty pejoratively. It was if you're ever reading old English, maybe Sherlock Holmes era, mystery novels, they'll be like, "Oh, he's such a quim." I don't want to say it's the same as cunt, because even saying that word, that word has such negative intonations, but I do think in the UK, quim might be a little bit close to that.
Occasionally, we get emails from outraged folks overseas, who are like, "Oh, I implore you to change the name of your company." I actually love getting those emails because to me, it's a conversation starter. I'm like, it seems like an amazing opportunity to ask the question, "What is so bad about being called a vagina?" This is an organ that has the power to literally give life, to expand, to contract, to reinvent itself by shedding its uterine lining once a month for about 40 years, and yet it's an incredibly strong and powerful organ in our bodies.
Yet, when we're telling someone to be brave or just stand up to the task and do it, we say, "Sack up," or "Grow a pair of balls," which is hilarious because I've never met a pair of balls that could withstand the intensity of being a vagina. To me, testicles are far more sensitive, far more delicate than the quim. For us, we really wanted to take back a word that has been used pejoratively against people with vaginas or people without vaginas. Really beg the question, what's actually so bad about being called this? In fact, I would say it's a huge compliment.
Matthew: This area of cannabis vaginal health is a broad umbrella with specific benefits under it. Can you talk a little bit about the pain points and benefits you hinted at earlier for women and cannabis vaginal health, the specifics of what they'll get relief from when they purchase Quim or why they purchase Quim?
Cyo: Yes, absolutely. I think that this is a great question because I think, particularly, at the early days of our business when we were fundraising, I would go out and pitch or talk to potential investors. They'd be like, "Isn't this a niche within a niche within a niche?" I think that there's this broad understanding that these health issues, be it chronic UTIs, yeast infections, difficulty climaxing, pain with menstruation, endometriosis, PCOS, low libido.
When you look at the percentage for each one of those pain points, over 75 of women will experience at least one yeast infection, over 60% will experience one UTI, 10% of women have endometriosis or PCOS, four out of five women experience pain with penetration. I would say at least 40% of women experience difficulty climaxing. Then you add in the fact that over half of the world's population has a vagina and suddenly this is not a niche category at all. This is a huge, I would say it's a huge market and it's a hugely underserved market.
I think due to our, we can call it Victorian shame around talking about women's health or intimate wellness or sexual health, these pain points really get pushed into hushed tones or embarrassed whispers or silly innuendos, instead of actually addressing them outright. I do think that's changing. Every time I put together our competition side, there are more and more people, more and more companies to put more logos to put on the slide.
I actually think that's incredibly exciting because I think it shows that there is not only advancements in science, but there is a generational shift around talking about these things. I think it's high time we did.
Matthew: Besides the pain points, there is an opportunity to heighten sensation. Can you talk a little bit about what vasodilation is and how Quim helps with there?
Cyo: Yes, absolutely. When cannabis is absorbed vaginally, it's going to act as a vasodilator as you just said. What that means is it's going to increase blood flow to the area of your body that you applied it to. If you apply it to the vulva, vagina, clitoris, perineum, what you're going to experience is a increase of blood flow which will heighten sensation and also increase your body's natural lubrication.
This is super important for anyone who-- I think there is a misconception, actually, I would say a major misconception that lubrication is a direct indication of arousal. That is not the case. It is one potential indication of arousal, but I think it's also can be that really dangerous misconception. Just because someone is lubricated doesn't-- Lubrication doesn't equal consent, first of all. Second of all, being a little bit dry doesn't necessarily mean that you're not arouse and not interested in engaging in sex.
Particularly, once you cross the age of about 45, you're looking at huge rates of women who experience pretty chronic vaginal dryness. That can be really helpful. CBD is also a known anti-inflammatory. If you have trouble relaxing your pelvic floor or potentially are recovering from vaginal tearing in a vaginal birth or potentially even have PTSD from sexual trauma, your vaginal canal and your pelvic floor muscles, they might be clenching up unconsciously to use.
Having something that will not only increase blood flow, but also help those muscles relax and help decrease pain with penetration. We often talk about vaginal health as being a precursor to the pursuit of pleasure. If some of these pain points are holding you back from being able to achieve pleasurable, intimate, or central time, we want to make sure that our products not only help to improve pleasure, but maybe help eliminate some of the roadblocks that might be keeping you from getting there.
Matthew: You mentioned your friends that you gave the party favors to. How about women that you don't know at all that become customers of Quim? What's the feedback you get from them their first time using it?
Cyo: If I can convince them, I would say that it's two-part. We are talking about a new product category in a new industry that is addressing pain points that have not been addressed by a product company maybe ever and so already out the gate. I think a lot of women are very dubious. They're like, "Is this a snake oil? This sounds expensive." Or like, "What? Am I going to get really stoned?" Or, "How could this possibly work?" I do think people can be a little bit dubious at first. I recently read or reread-- I always go back to this article.
It was a New York Times interview with the woman who created Moon Juice. It's like adaptogenic supplements, reishi mushroom powders. She's built this huge, huge business. The interviewer was like, "What do you say to people who think that this is all malarkey?" She was like, "What keeps me focused and what keeps me on track is knowing that I'm not trying to sell these products to everyone. I'm trying to sell these products to people who are interested maybe in feeling better or have tried a lot of other things and that didn't work. They're open and they want to feel better and they're willing to try something new."
If we get someone to try it, the likelihood is we're able to make believers out of a lot of people. I get emails all the time from women who are going through menopause, who haven't been able to have penetrative sex for a long time or their libidos are just in the tank, or maybe they're on certain SSRIs that make it harder to achieve an orgasm. They're like, "Oh, my God, I had the first orgasm that I've had in years and it was amazing." Or when we launched our most recent CBD product, Smooth Operator, which is an aloe-based CBD lube. We launched it in conjunction with a Cancer Survivor Network.
These were women who have breast cancer or ovarian cancer and they got it really young. They might be 25, 26, they just got married. Now, because they're going through chemo, their bodies are essentially in menopause. They are talking to us about being able to have penetrative sex without pain for the first time since they've been going through cancer treatment. I don't necessarily know if our products are for everyone, but I think there is a large enough group of people for whom our products can provide real relief and a much clearer path to pleasure, that it's okay if it's not for everyone.
There are enough people who do need these products and are curious and have tried so many other things. There's enough for it to be a very healthy market.
Matthew: How do you start out? Is it a scrappy startup? Do you get funds together? Do you decide, "Okay, this is my first product."? How do you get the initial retail relationships? What were those very first days like getting to the first sale?
Cyo: Particularly being in the Bay Area where there's so many new tech companies, and people are able to raise $3 million on an idea. I do think that our beginning is very different than a lot of other companies in cannabis, but also maybe more specifically, a lot of other new product companies in San Francisco. Rachel and I both had full-time jobs for the first year and a half of making these products.
We would meet after work, on the weekends. This was really a little side hustle. It took a long time. We incorporated the business at the end of 2016, launched our first beta products in April 2017, but really didn't start doing it full-time until about 2018, quitting our other jobs. We started the business with about $12,000 of our own savings. That got us until mid-2018. Obviously, we weren't paying ourselves. It was just our savings that we put into every bottle. We made every bottle in a shared kitchen in Oakland. This is pre-2018 so not all the licenses were in place. I was working as the head of sales at Meadow. Meadow is a tech company that builds software for California dispensary.
I'd been working in the industry for a few years. Because of that, I had built relationships with a few dispensaries. I'd sold them their software. I'd seen them at events. We had, let's say, two or three dispensaries that were willing to try this product. It looked, gosh, I wish you could see, I'll send you a picture of it afterward, the first iteration of our product packaging, it looks so, so, so different than what you see today.
We started selling in those few shops, and everyone put in really small orders. We made 10, 20 units, but what we saw is that every order, each subsequent order was growing in size. We were hearing from people either through our Instagram or our email, people were telling us that they were really helpful and that they were different and potentially better than some of the other infused lubes out there.
It really wasn't until oh, gosh, someone from Viceland reached out to us in about late 2017. Viceland is the TV channel of Vice and they have a show called Slutever. They were doing an episode called Stoned Pussies. Essentially about women and cannabis and using cannabis for sexual applications. They asked if we would be, I would say a pretty big part of that episode. They came to San Francisco. They had this whole film crew. It felt way bigger than we were ready for.
They filmed this whole segment and we're like, "Okay, cool. Now what?" They're like, "It will air to between 5 and 10 million people in February 2018." They were like, "So whatever you need to do to make-- They're like, "You're going to see a lot. You're going to get a ton of awareness from this so you need to make sure you have enough supply to-- You guys need to go make sure you have enough inventory because your phone's going to be ringing off the hook for these products. You need to go get your ducks in order." That really gave us the validation that we needed to quit our other jobs and to really kick it into gear and start fundraising.
Matthew: Wow, so the Viceland opportunity was really a huge opening.
Cyo: Totally. It was a major paradigm shift in our business. We went from having an email list of a couple of 100 to having an email list of a couple of 1,000. We went from being in three dispensaries in California to being in 25 in a couple of weeks. Maybe the craziest thing that happened because of that Viceland episode. That episode aired in February of 2018, but because the cable channel, they replay the episode pretty frequently.
We got an email to our customer support line around the 4th of July of 2018 with no body text, just subject line, and it said, "I'm so proud of you, and I couldn't be more happy for you." Due to the fact that I've been working in tech sales, which I think any salesperson would know this. If you give me your email, I will find you. I will find you on the internet. I see this guy's email and I have this moment. I saw the email, I was like, "Holy shit, that's my dad."
Cyo: I did a little research. I cried. I freaked out. Then probably an hour and a half later, I responded, "Dad? Is that you? Would you like to get to know each other?" To which he responded, "Yes, yes. A 100 times, yes." Fast forward, two weeks, I drove out to Las Vegas to meet my dad, which was the most amazing experience.
Cyo: Thank you Viceland.
Matthew: That's an interesting twist.
Cyo: Yes, it really was and really beautiful. Definitely, running a business is hard. There's so many ups and downs. Particularly in those first few years where you're not sure if you're going to make it. You haven't raised that much money yet and it feels so high-risk and you're just like, "Am I doing the right thing?" Then I think, meeting my dad through this business, was such an amazing confirmation that this is exactly what I'm supposed to be doing.
Matthew: Wow. You're in California now, what other geographies are you exploring?
Cyo: We're in California, we are actually right now, something that we're really interested in is getting-- Our THC products are in California, our CBD products are through everywhere in the US. We're in an early stage and some conversations around licensing out the THC brand to other areas and also setting up international distribution for these CBD products.
Matthew: Okay. Gosh, what countries are you looking at, Europe or Canada?
Cyo: Definitely Canada. Definitely, definitely Canada, but Europe, by way of the UK.
Matthew: Okay, great. What's the price point just for people to get a sense here of Quim?
Cyo: Our CBD products retail for $48. The THC products, as I'm sure you know, the tax rate in every county is a little bit different. A lot of dispensaries pass on the tax to the consumer. You should be able to find Night Moves and Oh YES!, our two THC products, from between, I would say $48-- Once again, depending on the tax rate, they should be $48 to $56, but depending on where you are, it might be let's say $50 to, I hope not, but $75.
That being said, earlier this year because we don't have as much pricing control on the THC side, dispensaries really can mark them up however much they want. We actually launched mini versions of our two THC products that will always retail for under $25. That's a 10-milliliter bottle. It will probably give you about maybe 10 uses, 5 to 10 uses. It allows consumers to try the product, get a feel for it. If they like it, they can make the bigger investment.
It also allows us to give those to budtenders who are really, I think of them as the true brand ambassadors of the cannabis industry. They're really your first line of defense or first awareness of the brand. It's really important that they're able to try the products and evangelize them.
Matthew: Great point because how you get mindshare with budtenders are inundated with all these different products. I was curious how you do that so I'm glad that you mentioned it. You give them a sample product. How do you go about educating them? You just talk to them or what's your strategy?
Cyo: Yes. That actually, I would say pre-COVID was one of my favorite parts of my job, definitely not the most scalable side of the business, which we have now made a bunch of updates to make sure it is more scalable, but I would go in. First, I do an hour and a half long training with the sales team of our distributor. A key part of that training is I will just make them say vagina.
Everyone has to say vagina over and over again, until everyone, even the 22-year-old frat boy can say it without laughing, because that to me is the first step. You need to be able to talk about vaginal health, intimate wellness without laughing about it, because when your patients come in, if they're interested in these products, it's probably not funny to them. Being able to address these products without getting squeamish is so important.
Then I want to talk to them about how common these issues are. I'm like, "Guys, I know, we are taught to believe or, in our society, we don't really talk about these things, but I want you to just understand how prevalent they are because that'll make you feel less embarrassed." Just knowing that if someone with a vagina walks in, there's a 75% chance they know what you're talking about already, probably even higher.
The first step is definitely making sure our distribution sales team is educated, but then I would actually go into the majority of the shops who we work with and do a training with all of their staff. Since COVID hit we have invested a lot of time and resources into building online training guides. Now, both THC and CBD, every time we start working with a new shop or every two months with one of our existing retailers, we schedule a Zoom meeting with them wherein I walk them through the training, and then I send it.
We send over PDFs that are really easy to understand. It's not like we send over a massive Google Doc that's all text. We try and make it really easy and we want to make ourselves available because we understand-- These products, they do take some education. I think that that's our responsibility to make sure if we're selling products to a retailer. I think we all know it costs a fair amount of money to open a new door, open a new account. Once you open a new account, there's an amazing opportunity there to bring in a lot of revenue. It's like account management 101. Do you want to put all your resources towards opening a new door? That's a waste of resources, it's a waste of capital if you can't keep those shops reordering.
Matthew: Looking ahead the next three to five years, how do you see the cannabis women's health field evolving?
Cyo: We'll probably have more competitors. There will probably be newer applications, newer products. Maybe some of the larger cannabis brands or larger CBD brands that are making pain relief bombs or tinctures, they might expand to include intimate oils or latex safe lubes or suppositories. I also think there is the opportunity for companies like ourselves who have been very focused just on really focus on vaginal health and intimate wellness.
I think there'll be more an opportunity for brands like us to get acquired by larger MSOs, or just larger brands in the industry because we've done a pretty good job of defining what is our mission, what are our goals. We've stayed really laser-focused on that.
Matthew: I'd like to turn the interview to a few personal development questions. With that, is there a book that's had a big impact on your life or your way of thinking, that you'd like to share?
Cyo: There are so many. I'm a pretty avid reader. That's actually been one of the highlights of this year for me. I think I've probably finished almost 20 books. I don't know. It's too hard to pick a favorite or most influential of my whole life. Of the past year, definitely, the book that I return to again and again, I've written in the margins, I highlight, I share excerpts with my friends. It's a book called Hidden Power: Presidential Marriages That Shaped Our History. It's by a historian named Kati Marton.
It's nonfiction. I was an American history major. I love presidential history. Also, this year in the election, I was thinking so much about what makes a power couple. Also, I just got married. We were supposed to have a big wedding in August but just eloped last week and just thinking a lot about-
Cyo: Thank you so much. Thinking a lot about what it means to be a power team whether that's in my marriage with Woody or in my business with Rachel. What does it take when there is at least for these, it looks at 11 presidential marriages, sadly or at least, for the time being, all of the presidents are men and all the first ladies are women. What you really see is the strength of the team and how that impacted history and how their different personalities or psychology, what that really looks like in how policies were made or how we remember their presidency.
This year, I've been thinking so much about teamwork and particularly dynamic duos and how-- At least looking at all of these presidential marriages, both parties, both the president and the first lady, they were so focused on holding this office and were both deeply aware that they each had their part to play. Every president and their first lady had a different way of doing it and some of them were so much happier and some of them were so much more effective than others.
Particularly, this year, particularly, in the height of COVID, looking at the lack of leadership in the White House. At least on the outside, they don't look like a team. Donald Trump and Melania, they don't seem to have each other's backs. Thinking about Michelle and Barack and how they just seem so-- In some ways, I think the president and the first lady feel like mom and dad for the country and how-- Just thinking a lot about what that means.
Matthew: Cyo, what's the most interesting thing going on in your field besides what you're doing with Quim?
Cyo: I think the most interesting and probably most important thing that's going on in the industry is definitely around access to the cannabis industry. Cannabis prohibition has such deeply, deeply racist roots in this country and probably all over the world, but particularly in this country. I think the most important thing happening in the industry right now is how do we make sure the people whose backs this industry was built upon, primarily Black and brown people who have been targeted and persecuted for cannabis cultivation, manufacturing, distribution, selling, how do we make sure they're not locked out of the industry?
How do we make sure, in fact, that a lot of those people have priority licensing, that they are actually given more access to the first licenses? I would even say investment of capital, business mentorship support to make sure that the opportunity of this industry is more democratized and maybe preferentially so towards those who have risked and lost the most in the past.
Matthew: What is one thought you have that most people would disagree with you on?
Cyo: Oh, man.
Matthew: No easy questions here, Cyo.
Cyo: No, no, I know. I don't know if most people would disagree with this but it is something I've experienced when talking to other founders or-- I think there is an assumption that if you're an entrepreneur, there's this cult of busyness like, "Oh, my God, I'm so busy. I wake up at 5:00 AM, and I'm on my computer until midnight. That's the way I get shit done. I respond to emails the second they hit my inbox. I'm always on and I'm always available. I sleep with my phone under my pillow."
I really don't subscribe to that. In fact, in the maybe brief moments where I've tried that, I found that the quality of my work really suffers as does the quality of my life. I would say maybe more so than other entrepreneurs or founders, I really believe in balance and very strict boundaries. I had a professor in college who taught me this. The very first day of class, he was like, "Here are my office hours. Here are the hours that I would respond to emails. I respond to emails from--" I think it was [9:00] AM to [5:30] PM, Monday through Friday. "After that, you can come and see me in office hours which are listed here."
He was like, "If you think that you can email me at 11:30, the night before a paper is due and I'm going to respond, you're off your rocker." I think that we're so connected to technology, it's so easy to get a hold of people. I think it creates this sense that everything is an emergency and I really believe-- I so firmly believe that I need to save that energy for when the real emergencies hit because they will and they do.
When they do, I feel I have this amazing storage of energy because I don't treat most things like an emergency because they're not. When a real one comes around, I'm prepared and I have the emotional and mental bandwidth to really tackle it.
Matthew: I heard someone say that your email inbox is a prioritized list of other people's agenda for you and not your own agenda.
Matthew: That's interesting. I totally know what you mean. Where are you in the capital-raising process, Cyo?
Cyo: We have been running a crowd investment. A crowd investment campaign with Republic. I'm not sure if you're familiar with Republic.
Cyo: Super cool platform started by some of the early employees at AngelList. Republic is different than a kickstarter in that it's not a donation. It's not like, "Oh, donate $50 and we'll send you a sticker." Republic actually gives the ability to participate in a crowd SAFE. Right now, for a minimum of $100, you can invest $100 or up to $25,000 into Quim's business and actually participate in our crowd SAFE, meaning you actually become a shareholder in the company.
We've raised about $200,000 with that and we have probably about, I would say 30 days left.
Matthew: Great. By the time this hits the podcast feed here in a week, they'll be about three weeks left from one of theirs.
Matthew: Great. Now, Cyo, in closing, how can listeners reach out to you or find your product and also find where on Republic to reach you? Can you give the Republic URL?
Cyo: Absolutely. It is www.republic, R-E-P-U-B-L-I-C, .co/quim, Q-U-I-M. You can find more about our products. You can purchase our CBD products online and find out where to buy them in dispensaries on our website itsquim, I-T-S-Q-U-I-M, .com and you can also check us out on Instagram @itsquim, I-T-S.Q-U-I-M.
Matthew: Cyo, thanks so much for coming on the show. We really appreciate it. Thanks for educating us and what a wonderful story of reuniting with your dad. Good luck on all your future chapters.
Cyo: Thank you so much for having me. This was great.
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 guest 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 email@example.com. We'd love to hear from you. Please do not take any information from CannaInsider or its guests as medical advice. Contact your licensed physician before taking cannabis or using it for medical treatments. Promotional consideration may be provided by select guests, advertisers, or companies featured on CannaInsider.
Lastly, the host or guest on CannaInsider may or may not invest in the company's entrepreneurs profiled on the show. Please consult your licensed financial advisor before making any investment decisions. Final disclosure to see if you're still paying attention, this little whistle jingle you're listening to will get stuck in your head for the rest of the day. Thanks for listening and look for another CannaInsider episode soon. Take care, bye-bye.
[00:42:56] [END OF AUDIO]
Entrepreneurs are bringing pharmaceutical science to the cannabis world to create products that provide consistent and predictable benefits.
Here to tell us more about it is Andreas Boeckl, founder and CEO of Dispersa Labs.
Learn more at https://www.breathesula.com
[1:14] An inside look at Dispersa Labs, a biotech company using dry powder inhalation technology to create breathable cannabis
[1:54] Andreas’ background and how he came to start Dispersa Labs
[6:43] Why inhaling cannabis in powder form is better than smoking flower
[11:05] Spray-drying and why it’s important to Dispersa’s manufacturing process
[12:47] How Dispersa Labs suspends cannabinoids inside tiny aerosol particles to create Sula, a patented cannabis powder for pulmonary delivery
[14:15] Examples of commercial inhalants similar to Sula, including the popular asthma drug Advair
[22:20] How Sula is more discreet than other cannabis consumption methods
[31:42] Where Dispersa Labs currently is in the capital-raising process
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-Ainsider dot com. Now here's your program.
Today, we're going to learn how entrepreneurs are bringing pharmaceutical science to the cannabis world to create products that provide consistent and predictable benefits. I'm pleased to welcome Andreas Boeckl, CEO of Dispersa Labs to the show. Andreas, welcome to CannaInsider.
Andreas Boeckl: Thanks, Matt. It's really great to be here.
Matthew Kind: Give us a sense of geography. Where in the world are you today?
Andreas Boeckl: Yes, sure. I'm sitting in San Leandro, California, which is just about five minutes south of Oakland, and I'm at our manufacturing facility.
Matthew: You don't meet a lot of Leandros anymore, do you? It's a name that's gone by the wayside.
Andreas: No, it's fallen out of favor. Interesting observation.
Matthew: I want to bring that back, as well as Ezekiel and a few others. Can we work on that together?
Andreas: We can.
Matthew: Okay. Tell us, what is Dispersa Labs on a high level?
Andreas: Sure. Dispersa Labs uses pharmaceutical science and manufacturing practices really to harness the immense potential of cannabis. We engineer infused powders that we use to enable really new and improved ways of delivering these cannabinoids, forming them into doses that are more precise, predictable, and healthier. We're just positioning ourselves to launch our first product based on our technology that we're bringing to market, and it's called Sula Breathable Cannabis.
Matthew: Andreas, can you share a little bit about your background and journey and how you came to start Dispersa Labs and how you got into the cannabis space, and so forth?
Andreas: I'd be happy to. I started working in biotech and pharma, pretty much exactly 20 years ago this month, at a company that was fittingly called Inhale Therapeutics. It's here in the San Francisco Bay area as well. At that company, we developed the first FDA approved inhaled powder form of insulin for treating type two diabetes. Then that group went on to develop a few other dry powder inhaler products for other diseases. It was there that I really fell in love with the practice of engineering particles for inhalation.
Part of my core values is also helping people, wanting to be of service to others. I saw this as a purpose for me to be able to intervene, in my own little way, to help further the cause of addressing unmet medical needs to help patients live longer and healthier lives. Really, my entry into cannabis came a little later on when, in 2014, I joined forces with a market researcher and my co-founder whose name is David Cookson. We both understood at that time that there was a lot of therapeutic value in cannabinoids.
Also, that they hadn't quite served us personally well. Coupling our backgrounds, market research with this dry powder inhaler approach, we got together and just started hammering on some solutions and we are where we are today now, six years later. It's been a long journey.
Matthew: Yes. You're always working on powders, you've just pivoted and worked on powders in the cannabis space. Do you remember the aha moment with you and your co-founder where you're like, "I think this is what our product should be," and the reason why?
Andreas: The aha moment, there were some formative things that happened well before I met with David and we started along this journey in creating these powders. I guess it started back in college. I had a couple of pretty negative experiences with joints and THC, and it really got me to come to a conclusion that cannabis probably wasn't for me. It just didn't sit well with me and the outcomes weren't good. I didn't have a good time. I got that paranoid, anxious feeling and wanted to disappear from wherever I was.
A little bit later on, once I was working at Inhale, I found myself in a very stressful job, working in cleanrooms and working really long hours; but despite the physical fatigue, I was having great difficulty falling asleep and staying asleep. It was a real problem so I was a walking zombie at work. A colleague at the time pulled me aside and said, "You don't look well. What's going on?" I described the situation and she said, "Have you thought about trying cannabis?"
I said, "Diane, that really isn't for me. It doesn't work for me," and ran her through the story, the backstory. She said, "Well, you probably just consume too much. Why don't you just try just a tiny little puff and just see what happens?" I built up my courage, and I think it was a Friday night or something like that, to try this. I did what she said. I had a little one-hitter, and just took a tiny puff of some nice, kind herbs. I really got the first night solid sleep that I had probably in months, maybe in six months, and I woke up feeling totally refreshed.
It was then that light bulb went off over my head and it said, "Cannabis is medicine." It was also a time in California that medical cannabis became legal in about '96 so a few years before my little journey there. It's something that in the media, "Medical cannabis this--," and I always discounted that. It was really with that personal journey and that experience where I said, "This is real medicine," and it really changed my mind, just that one formative experience.
The other thing is in reflecting on my negative experiences, it also planted a seed of, "Hey, the dosing is just wrong. We need to be able to control this, entertain this molecule, and get that dosing right."
Matthew: Everybody's familiar with inhaling cannabis in the form of a joint like you mentioned. What really makes this better? Because we're probably overcoming a little bit of, I'll say, ignorance for the average consumer, where they're like, "Well, I'm not used to inhaling something. Why do I want to do this?" What do you tell them, Andreas?
Andreas: A lot of folks have a background like me, or they're just very reluctant to try cannabis because of a lot of the negatives that have been put out there over the multi-generations of disinformation about it. That fear, coupled with the way it's currently presented in many cases, "Smoke this joint, what's that going to do to me?" It's paralyzing to a lot of people. Sula is really the first true fixed dose of inhalable cannabinoids. What's contained within a single capsule, the powder that's contained in a capsule that's then inhaled, is a fixed-dose.
You can't get more than what's presented in that single dose. You could always take a second capsule if you want to, but it makes it what would be referred to as a standardized dosage form, which a lot of consumers are familiar with from pharmaceuticals or over-the-counter wellness products like supplements. One of the other things that makes it a lot better, in our view, is that it has this almost immediate effect and that comes with a healthier profile.
Also, because there's really no burning or heating associated with smoking or vaping. It also delivers a very balanced, well-rounded high for people who want to anticipate and control their experience on cannabis. Another advantage is really that the inhaler is just purely a mechanical device. There's no electronics involved. There's no heat sources. There are no risk of explosion in your pocket and there's no mess created by joints and other smokable forms, so it's a very tidy little system. It's also quite robust. It can fire hundreds of doses through a single inhaler so it's not a big burden on the waste stream that we're always also concerned about in industry these days.
Matthew: Okay. The pathway into the bloodstream is fast and efficient and then you pointed out predictable too which is really helpful for people that need to know what they're getting into. Maybe they're going to work, maybe they're even just going out with friends, but they want to know, "Hey, what's going to happen here?" And they can feel comfortable that they're going to get a very predictable outcome. You mentioned a little bit about how it feels, but how would you describe it in more detail? Give us more adjectives around that of how it feels maybe, and contrast that to other ways of consuming?
Andreas: Sure. Absolutely. We get a lot of people who right after inhaling their first dose of Sula say something like, "Wait, should I be feeling this already?" It's really surprisingly fast-acting and one of the great benefits for that fast onset of effect and where it's very useful is in patients who use this for treating anxiety, pain, sleep, seizures, and more conditions where really fast-acting medicines is what's in order. Who wants to wait for relief from those symptoms for an hour or two, which is common with orally ingested products? Another piece of feedback in terms of the effect that people feel is that it's a very clean high. I guess less of the fog and just a very clean experience.
Matthew: With the plant, you know you're getting THC and the full-spectrum cannabinoids, but you don't know what else you're getting too on top of it. You've got plant material and when you combust that, what exactly is happening there? So remove some variables.
Matthew: Okay, so let's just define a few things. Can you describe what spray drying is?
Andreas: Yes, so spray drying is the process that we use to manufacture our powders. It's a simple single-step and very scalable manufacturing process that is utilized across a number of industries; foods, cosmetics, basic materials, nutraceuticals, pharma, including other dry powder inhaler type applications, and it's just a simple process where there are three unit operations. First one is atomization, where we create these tiny droplets that are on a micron scale. Then those droplets are dried within a chamber that looks like a fermenter if people are familiar with brewing these days and what a microbrewery looks like.
It looks like one of those big stainless steel vessels. It's a drying chamber where those little tiny droplets then interact with hot filtered air. That's where the liquid, which carries the drug and also our inactive but functional ingredients which we call excipients, are converted into a powder and then that powder goes into the third unit operation which is the collection of that powder. That's the third step where we concentrate and collect that powder in bulk
Spray drying allows to have great control over the size, shape, and composition of these powders. Pretty much unlike any other process that's out there. It's probably why it's so broadly used across industries.
Matthew: How about aerosol particles? How do you get cannabinoids in there? Can you just describe what aerosol particles are and then how you get the cannabinoids in there, so people can get a visual?
Andreas: Yes, so aerosol is derived from aero-solution which it's short for that. It essentially describes particles that are small enough to remain suspended or entrained in air. Some common examples of aerosols include fog, morning fog, some dust, or smoke is something we're also familiar with that would qualify as an aerosol. Basically, the aerodynamic forces on these tiny particles trump or far exceed the gravitational forces on the particles because of their size.
The science is really fascinating and it's the rabbit hole I fell into many, [chuckles] many years ago; but it's basically tiny, tiny particles that respond more to forces that are in the air versus gravity. They don't fall to the ground very quickly, and some of these aerosol particles can remain suspended in the air for days and weeks depending on what's going on with winds blowing around. We're all familiar with dusting our homes and stuff like that. Those would be aerosol particles that are conveyed around through the atmosphere end up on our coffee tables.
Matthew: There's other kinds of inhalants on the market people have probably seen. Can you talk a little bit about those? They're not cannabis but how do people use those, and is it pretty much the same modality then as what you're describing here with Sula?
Andreas: Yes, sure. There are currently dozens of inhalation medicines that are on the market for treating a wide range or widening range of medical conditions. Still, most of those target diseases of the lung or localized treatment of the lung such as asthma, COPD, but they're also used for treating lung infections that are common in cystic fibrosis. I guess a brand name that most people might be familiar with for a dry powder inhaler is Advair. I think we've all seen TV spots on Advair.
Matthew: This is not a new technology but a repurposed technology. Are prospective customers comfortable with this type of product out of the gate or how do you get them comfortable to the point where they're saying, "All right, I want this to be my default medicine or recreational device."?
Andreas: Right. Yes, so most consumers, unless they have some sort of asthma or COPD, they're probably not that familiar with inhaling medications and it does cause a little bit of worry I guess. It does require some education on our part and we're gearing up to do that with some webinars and things like that. Getting the information to people who we want to interact with us and get the straight story on what the benefits of inhaling dry powders are. On a really high level, when you think about smoking or vaping, you're technically inhaling particles still.
It's just that they're really, really like an order of magnitude smaller than what we're delivering, so kind of in the 200 to 300 nanometer size range versus we're in the 1 to 5 micron size range. The other difference with smoking or vaping, there's heating and combustion which as you alluded to earlier creates a cocktail of chemicals that is definitely not listed on the label of those products.
That soup includes some known carcinogens so we really try to educate folks on that. "Here, we have a product that has been formulated very specifically and with exact same specifications to ensure healthy outcomes. The last thing we want to do is have folks who are already battling some sort of disease state add further insult to their biology and harm their wellbeing. While they're treating one symptom, they might be creating new ones."
We have our four non-cannabis excipients or functional ingredients listed proudly on our package so consumers know exactly what they're inhaling into their lungs. We consider this really to be the first open-label inhalation product on the market, and all the trends in the marketplace also support this sort of development because more and more people are shopping for organic foods. The whole foods revolution is definitely a major thing and a movement at this point.
Also, I haven't mentioned, with COVID happening, awareness of protecting lung health has really also been goosed, and more and more folks are looking for alternatives to smoking and vaping because it does cause concerns and for the potential susceptibility to more extreme or severe COVID implications.
Matthew: Is this engineered to bypass the airways, like cough reflex then, or how do you think about the cough reflex? How does that work? I didn't form that question articulately.
Andreas: Yes, so we've really taken a lot of care to engineer the particles so that they largely bypass the upper airways, but it's a numbers game at some point. If you're inhaling in the cases of our initial product, 10 milligrams of powder, that's not 10 milligrams of just THC but 10 milligrams of powder which contains 1 milligram of THC. There's a chance that a number of those particles are going to interact with those upper airways and this can cause spontaneous cough.
We consider that to be a minor adverse event in the clinical realm. It seems to be most common in patients who are smoke or vape naive and also those who have never been familiar with the use of an inhaler. One of the things that we also educate on is that for those folks who do experience cough, it tends to go away with familiarity and improvement of the inhalation maneuver. Practice makes perfect and most folks report that within three to five tries, they've got it down and they're no longer having that minor spontaneous cough.
Then I guess it's also probably worth mentioning that most people cough the first time that they take a drag off a joint or hit a bong as they say. That's because cannabinoids are irritants. They're very bitter in taste profile. That cough response is triggered by sensory neurons in the upper airways that interact with those bitter molecules and so you get cough. I guess if the juice is worth the squeeze, people will continue.
Matthew: We touched on this a little bit, but just to draw a clear contrast: This is different than vaping, A, because there's no heating element, it's just a mechanical spray. The size is different, and how about in terms of what stays in versus what's exhaled?
Andreas: Great question. As you mentioned, there's no heating or combustion and those are the reactions that create what we perceive as smoke. It's actually a mixture of solids, oils, some tars, and some gases. They're literally made up of hundreds of chemicals, and in smoking and vaping, it creates particles around 200-300 nanometers in size. What we know is that those particles are generally too small to interact with the mucosa in the lungs and then stick.
What we see is very common when people smoke or vape is a huge plume of secondhand smoke that comes out, or fugitive aerosol as some scientists like to call it, that comes out of their mouths when they exhale. Some people take great pride in and make these big, beautiful clouds but that's really waste. It's just going off into the environment.
What we know from the science is that the ideal particle size for optimal lung deposition is between 1 and 5 micrometers or microns. It's about an order of magnitude larger than the smoke or vape. That's a long way of saying that we get about 80% of what's in the capsule into the lungs, whereas smoking or vaping, on a good day, that's 15%. We flip that efficiency upside down with our approach.
Matthew: In terms of like a continuum of being discreet, where does this fall compared to other options out there?
Andreas: In terms of inhalation, we think that this is by far the most discreet method for consuming cannabinoids. Largely because none of the signature odors that are associated with combustion or heating are really generated, that signature smell. One of our friends in the industry trial, this is not too long ago, said, "Wow, that was like an invisible bong rip."
Literally, nothing comes out. We do coach about a two to three second breath-hold because if someone who's familiar with vaping or smoking and is used to seeing a cloud of smoke come out, if they immediately exhale after inhaling a Sula dose, you will see the particles come out; but if you just practice a two to three second breath hold, you get that 80% lung deposition.
I would just add to that, that because of the discreet nature, we have a form that delivers on that fast-acting relief component, but also really frees people up to use cannabis in all sorts of settings where it was previously impossible. You can even think of settings like hospitals, for example, where you can't vapor smoke in a hospital. If you want quick relief and use cannabinoids, here's a way you could do that. There are plenty of other settings. I'm sure everyone can let their imaginations run wild.
Matthew: Mine is running wild right now. I picture myself right about to reach the summit on a rollercoaster and pulling it out.
Andreas: That would be a different experience for sure.
Matthew: Let's talk about the amount of THC you put in one dose and how you arrived at that.
Andreas: Through our proprietary formulation and powder production and capsule filling processes, we really have tremendous control over how much THC we put into each dose. It was based on a significant amount of trialing that we did with folks, that we arrived on one milligram of THC for our launch product. The feedback we got was about 60% of trialers said that was the perfect dose for them. We really do want to give people what they say-- Honor their feedback and give them something that is a nice functional dose.
Matthew: What do you think people are using this for? Is it primarily general wellness, or how would you describe its use case spectrum?
Andreas: We consider the initial THC launch product to be a wellness dose, and that feedback I was just referring to corroborates that. People use it as they would any other THC-forward product. By now, people who are familiar with THC or know what they want to use it for and when to use it, the predictability and that discreet dosing really enable busy people to fit cannabis into their lifestyles.
For example, someone who has a two to three hour window before they got to go drive somewhere or perform some tasks that require maybe a little more mental acuity or agility, they can find that two or three hours and know that Sula will fit within that window and they'll be completely back to their normal state at the end of that session. Whereas other forms, it's a little bit more guesswork involved, and you have to free up probably a little bit more time to budget for any excursions from your ideal dosing regimen.
Matthew: People are thinking like, "One milligram? Hey, as rookie cookie is five milligrams. How can this be?" But it's really like the precision medical process where it's an exact fit, like hitting a target. It's like a bulls-eye compared to maybe a hit from a joint being somewhere on the dart board but not a perfect bulls-eye. Would you say that's a good analogy, or did I just take a hit from one of your devices and now nothing make sense?
Andreas: [laughs] That's a great way of thinking of it. It's really this benefit of the very efficient delivery approach that we have that gets it directly into the bloodstream quickly. You mentioned a cookie. That's going to go through the liver. It's going to go through first-pass metabolism. Absorption of cannabinoids through the gastrointestinal system is really low. There are metabolites are generated in the case of THC, which are probably responsible for the reason why people say edibles feel differently. It's probably because it's a different compound that's at work there. It's most likely one of a couple-- I guess the one that's most researched is 11-Hydroxy-THC, which is allegedly something like up to 10 times as psychotropic as Delta-9 THC.
In our case, we're actually delivering the THC directly to the bloodstream and then it goes directly to the brain and then all the receptors. It does feel like 5 to 10 milligrams of a dose taken by other methods. It really does surprise a lot of people the first time they try it.
Matthew: What about intellectual property? Do you have any patents on this tech?
Andreas: Yes. There are a lot of companies out there that have a patent-pending. We're one of the few companies out there with an actual granted patent that covers our formulation process and some of the unique qualities that we impart on our spray-dried cannabinoid powders. We're very active in filing additional claims to build a beachhead around our core IP.
Matthew: Now, there's some early research that suggests but hasn't yet been proven that cannabinoids may help people recover from COVID-19. Can you talk about that a little bit?
Andreas: This is really early and it's data that's generated in a mouse study, so it's not human data. The caveat is jumping from mice to humans isn't always a linear outcome. This is research that came out in the spring out of the University of South Carolina and it really got my attention because they dose these mice with a pathogen that induces a cytokine storm, which a lot of us have heard about or are familiar with. Which then creates a condition called Acute Respiratory Distress Syndrome or ARDS. That's really similar to what happens for some human COVID patients. In the case of these mice, this induced cytokine storm and ARDS results in significant mortality in those mice. They pretty much always die. The mice in this study were all given the pathogen to induce that lethal condition and one of the cohorts was given placebo while the other one was treated with THC.
What the investigators found was that all of the rodent patients who got the THC treatment actually survived. Whereas all the ones that were in the placebo died basically. Again, I would just caution that it's very early, but I think it's really interesting and it speaks to what a lot of subject matter experts in the clinical space of cannabinoids have been talking about how certain cannabinoids can help modulate homeostasis.
What we see with things like the cytokine storm and ARDS is a runaway system where a body starts attacking itself because of this distress. If we can intervene with cannabinoids that remind the audience; very few side effects, no non-lethal dose, we can potentially have a way of treating not only COVID, which I hope we'll have a successful vaccine here in the near future, but potentially other pathogens that come our way in the future. It'd be a great tool to have in our toolkit if so needed.
Matthew: Where are you in the capital-raising process, Andreas?
Andreas: As I mentioned, we've been doing this for six years. We're really playing the long game and committed to getting this important medicine to all those who need it. We've been working hard towards a Series A, which we see unfolding toward the end of next year, but we've just opened a bridge round to get a couple of new skews on the market that I'm really excited about.
We've got a sleep formula that seems to be very effective in some limited trialing and then a CBD version of Sula that some folks have been using to treat anxiety actually related to COVID. What's interesting is it's been pretty solid feedback on that as well. Folks saying that it's the first CBD product that they can actually feel, that it's working, and it's probably because of just that novel inhalation route and its fast-acting nature, but it doesn't go through the gut, as I mentioned earlier, and go through first-pass metabolism.
Again, very small doses may prove to be effective, like one milligram or a two-milligram dose of CBD, whereas others, a lot of products out there on the market are delivering 20 or more milligrams.
Matthew: I love this stuff. Now for accredited investors that are listening, can they participate in your capital raising rounds or how does that work?
Andreas: Yes, only accredited investors at this point and they can just interact with us through our website. It's breathesula.com. It's B-R-E-A-T-H-E-S-U-L-A.com. We have a contact form there, or they're welcome to send us an email at firstname.lastname@example.org. That's D-I-S-P-E-R-S-A-L-A-B-S.com.
Matthew: Well, Andrea's, I'd like to go to some personal development questions with that. Is there a book that's had a big impact on your life or way of thinking you'd like to share?
Andreas: Oh, yes, sure. These days I've got a little one at home and with entrepreneurship being what it is and wanting to spend as much time as I can with the little guy. Most of my reading of late has been things like Goodnight Moon or Dr. Seuss and the such, but I guess in terms of impact, I guess I'm going to have to stick with the Dr. Seuss. I think a lot of his prose speak directly to a lot of the serious challenges that humanity faces today. The Lorax is a prime example of that. I think it's time for all of us to stand up and speak for the trees.
Matthew: Okay, and what do you think the most interesting thing going on in your field is besides what you're doing?
Andreas: I guess in dry powder inhalation, there's a lot of new interest in R&D in this space, and some of that is definitely directly correlated to COVID. Folks are really primed to understand what's going on in the lungs and how we can administer medications to the lungs.
I think getting drugs to the lungs offers really some great opportunities to treat both diseases that affect the lungs, but then also more systemic conditions, and that's what we're doing with the cannabinoids. Because of this efficiency of the route of administration that I talked about earlier, researchers really have an opportunity here to reduce dose size and by doing this, we can reduce side effects compared to traditionally more orally ingested drug forms, I guess.
This way, we can maximize the reward while minimizing risk to patients. I'll just add to that some of the research into psychedelics such as psilocybin, LSD, and DMT are really compelling. I think it's also really exciting because these are some serious unmet needs and societal problems that these compounds seem well-suited to address.
PTSD, anxiety, all kinds of psychological disorders, and a lot of those things are the things that plague us societally. I think because the potency of those compounds, it represents really a great opportunity for standardized dosages that are delivered to the lungs by a dry powder inhaler, quite frankly. There's a lot of research in that space right now and we're happy to be a part of that.
Matthew: LSD seems like you could microdose with an inhaler. That seems like that makes sense because it's a chemical you can make into an aerosol, but how would you do that with psilocybin?
Andreas: The same thing. It just needs to get into the bloodstream. A lot of people who are experts in the area of psilocybin and other entheogens like that talk about different levels of experience, like level one through five.
We can envision a version of a dry powder inhaler that's a fixed-dose like this where a capsule equals a level. If you need to have a level one experience, you take one capsule. If you need to have a level five experience, maybe you take five capsules, or maybe you just develop a capsule that has the level five potency in it.
These are very, very powerful drugs that require micrograms versus milligrams in many cases. There's a lot of room in those tiny capsules to present a lot of different dosages to patients.
Matthew: Is there a room for like a rescue aerosol inhaler where you get too high or maybe you took too much psilocybin or LSD and you're like, "Holy cow, I need to turn down the volume on this." Do you ever think about that?
Andreas: We have. Yes, absolutely. It's something that there's definitely an unmet need there. We're not quite there yet in terms of knowing exactly what combination of molecules is going to switch off those effects that we might want to attenuate in those cases, but there's definitely an unmet need, and where there's an unmet need, there's going to be some innovations. If folks have ideas about what might do that job, we'd be very interested in talking to them about opportunities.
Matthew: What's one thought you have that most people would disagree with you on? It can be about anything.
Andreas: I think a lot about the human condition and society and how all these constructs; the life we live and what we participate in and consider normal is largely a construct. In thinking about compounds and things that we consume, there's really a continuum when we think about things like cannabis.
I'll give you an example of alcohol. Alcohol, everyone just assumes, "Okay, well, this is something net-negative but it's something that people really have latched onto and have many people use it daily." I would argue that a lot of that use is medicinal, people use it to unplug, switch off, to table the stressors of a day, of which today we have more and more of those.
I think a lot of these things are on a more of a continuum. We do ourselves a disservice by labeling them as, "Well, this is medicinal," or, "This is recreational." I think there's a big grey area in-between where people derive benefits from, and I'll jump back to cannabinoids here. I resist the idea of just saying, "This is a medical use," or, "This is a recreational use." I think there's this grey area in-between it's a beautiful space to ponder. I think someone who comes home from a stressful day and pours themselves a martini or has a glass of wine, I think that's a medicinal use of alcohol.
Matthew: Yes, I agree with that. When someone says that another person is a piece of work, we know what that means. Are you a piece of work Andreas?
Matthew: You don't have to answer that. I'm just kidding around with you. [laughs]
Andreas: I like that. The answer is yes. My wife would say, "Yes, you're a piece of work."
Matthew: Andreas, as we close, can you tell listeners how to find your products and also accredited investors? Just remind them how to connect with you.
Andreas: Yes, so right now we're actually about to launch with some delivery services that we're courting. We're not quite there yet in terms of a deal, but our goal is to get this into consumer's hands via delivery services, and then also select dispensaries, and we've had some great outreach in our direction recently about this as awareness of Sula, this option of dry powder inhaler, kind of makes the rounds. Yes, and folks can absolutely reach out to us either via the breathesula.com website and the contact form there or email@example.com
Matthew: Andreas, thanks so much for coming on the show and educating us. Have a great holiday season, and we look forward to chatting with you in 2021.
Andreas: What a pleasure, Matt. I'd love to come back and talk about some of the innovations we've got coming up.
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 guest 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 your free report at cannainsider.com/trends. Have a suggestion for an awesome guest on CannaInsider? Simply send us an email at firstname.lastname@example.org. We'd love to hear from you.
Please do not take any information from CannaInsider or its guests as medical advice. Contact your licensed physician before taking cannabis or using it for medical treatments. Promotional consideration may be provided by select guests, advertisers, or companies featured in CannaInsider. Lastly, the host or guests on CannaInsider may or may not invest in the companies entrepreneurs profiled on the show. Please consult your licensed financial advisor before making any investment decisions.
Final disclosure to see if you're still paying attention. This little whistle jingle you're listening to will get stuck in your head for the rest of the day. Thanks for listening and look for another CannaInsider episode soon. Take care, bye-bye.
[00:43:33] [END OF AUDIO]
What will the cannabis industry look like in the next few years? Paul Rosen of Global Go shares the nine trends shaping cannabis worldwide (and wait till you hear #4).
Learn more at https://globalgo.consulting
[2:22] An inside look at Global Go, one of the world’s leading consulting firms for cannabis and hemp businesses
[4:34] Paul’s background and how he got into the cannabis space
[10:03] The nine trends shaping cannabis on a global scale, beginning with catastrophic failure
[16:20] The divergence of medical and recreational markets
[21:36] The end of Canadian domination in cannabis and the rise of the US
[29:02] New FDA rulings on CBD
[35:39] Biosynthesis and what it could mean for the cannabis industry
[40:57] Why “cash remains king” in cannabis
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. Now here's your program.
Today we're going to hear about the nine trends impacting the cannabis industry from industry insider Paul Rosen of Global Go. Paul, welcome to CannaInsider.
Paul Rosen: Great to be here. Thank you so much for having me.
Matthew: Give us a sense of geography. Where are you in the world today?
Paul: I am in beautiful Canada where I am from, in the province of Ontario. I wish your audience could see where I am. I'm at my country home, which is on Lake Ontario, I think the third largest lake in the world. We're here in late fall, early winter. We had a bit of snow this morning, which happily did not stay on the ground. This is where I've been sheltering in place along with my family since, really, COVID struck hard in March.
Matthew: Okay. When are they going to let us Americans back up into Canada? I'm feeling a little bit like a secondhand citizen here? What's the deal?
Paul: Yes, I could [crosstalk]
Matthew: I know you were personally responsible for it.
Paul: Yes. I'll just make a quick phone call and everything will be fine. Let me say, Matt, that it's a reciprocal thing that we also are under some restrictions to just being able to enter the United States. We need to have a viable reason other than just feel like going on a holiday or visiting. I think with the promise around the Moderna vaccine and the Pfizer vaccine, there's a lot of optimism that will start in the spring, to start to see something that looks a bit more normal. I do think Americans can come to Canada still, but they need to have a compelling reason.
Matthew: Okay. Got it. How about just like our deep desire for authentic maple syrup? Is that a good reason--
Paul: So good. I was just driving in my neck of the woods and all the trees are being tapped for sap right now, so it is that season here. [chuckles] Yes, Canadians were good at maple syrup, bacon, doughnuts, hockey, and of course, cannabis.
Matthew: Yes. We're going to talk a lot about that. Good segue. Paul, before we do that, what is Global Go at a high level?
Paul: Global Go is a advisory platform that is delivering and set up to continue to deliver a whole range of service offerings to the global cannabis industry, so kind of my core thesis, which is something I know we're going to touch upon, is that cannabis already has gone global and more and more countries are beginning to adopt sensible cannabis reform, whether it's medical or recreational. I don't have enough fingers in both hands to count the number of countries that have transitioned if you will. I think that we can learn a lot from some of the early countries like Canada, where I was an early entrepreneur, as to what best practices work and what not so great practices should be discarded.
Global Go is really designed to help not just emerging cannabis entrepreneurs, but either mature or emerging cannabis entrepreneurs in any jurisdiction, minimize their risk, to be honest, because this is a risky industry. We have a whole range of service offerings from the very basics of applying for licenses, to meaningful consultation on growth technology, extraction technology, to brokering deals by being able to act for buyer or seller to move cannabinoids compounds from one regulated jurisdiction to another, to guide on capital strategy, to guide an M&A strategy. From the micro to the macro, we're a full-service advisory.
I call it a platform because we've opened up affiliate offices in a number of the countries that I predict will have a bright future in global cannabis. These include Colombia, Brazil, Ecuador, Switzerland, Cyprus, Mexico, Singapore as a hub into Asia. We're really building what I think is going to be like the McKinsey of cannabis. When I say we, myself and a lot of really talented, hard-working individuals that all have years of experience in the global regulated cannabis industry.
Matthew: Okay. Can you talk a little bit about your background and what you were doing before Global Go?
Paul: Definitely. I'm in my mid-50s just to put an age to a voice, which means I've been at it careerwise for a long time. My ark is kind of interesting, I think, as to how I got into cannabis, which leads to Global Go. I'm an attorney in Canada. Although I stopped practicing law in the late 1990s- Matt, I was a constitutional and criminal defense attorney, a wonderful career, the foundation stone of everything that happened since, but I was really more built for business than I was to be a lawyer. I just never loved selling my time by the hour as a business model. I could kind of calculate my lifetime earnings when I was about 30 years old, which concerned me, and I would really enjoy the risk and the potential upside of business.
I've been a small business owner and operator my entire career. Even as a lawyer, I opened my own law firm, but I entered the cannabis industry way back in 2012. That was around the time that the Canadian government was beginning to promulgate a commercial cultivation licensing program in Canada for cannabis. Those words really got my attention, licensing, commercial cultivation. I had a strong sense, like a lot of other early Canadian participants, that this was going to be quite a big economic boom to the country and a great opportunity for risk on entrepreneurs to enter the industry, and I did. I started a company with three co-founders that originally was called Hortican Incorporated, and then, it name changed to PharmaCan Capital Corporation.
We figured out quickly that our skillset was to analyze deals rather than necessarily run or apply to run a grow up, and so we became the first Canadian investment company to invest in other cannabis operators companies. I took that company public with my colleagues in Canada in 2014. I think we were the third public company in Canada. Then the company was corporate rebranded to the Cronos Group in October 2016, shortly after I had departed as CEO. That whole experience, which for me, lasted about four years was the deepest possible dive into what a regulated cannabis regime or platform would look like. It really blew my mind as to what the possibilities were around this plant, both as a medicine, as a wellness product, but also as a source of great commercial potential.
I've been super active in the cannabis industry. I won't bore you and your audience with everything I've done. I started a number of companies, one of which is Global Go. The reason I started Global Go, along with some talented partners, is when I wasn't starting my own companies, I was doing advisory on the side for a whole range of great cannabis companies, quite a few of which have gone on to great outcomes.
I was never an advisor. I always looked at consultants or advisors with a little bit of a skeptical eye. I always felt like entrepreneurs do advisors' advice. Probably, I was a little bit too prideful in that assessment but it was how I felt. I did discover that I had a knack, especially for helping early-stage entrepreneurs navigate both the opportunities and the potential risk around startup culture. I never really thought that was a scalable business, but it was a great pleasure to be able to mind share with all sorts of cool companies, not just in cannabis, in multiple industries, learn from them, but also impart what experience had taught me and wisdom and experience are really something that you earn over time. It's not a function of intelligence. It's a function of experience.
I love that advisory business because I really felt that I was adding value and I could see the impact that was having on young companies, but to me, it wasn't scalable. Then I met a great colleague of mine named Tom Zuber, another great colleague named Phil Valvardi, and we decided to launch this company together because we saw what was a scalable platform and we have scaled quickly. We have about 15 staff now. We operate in, as I mentioned, seven different countries, and we have a pretty incredible client list growing all the time.
I've been all-in Matt in the cannabis industry. Like once I got pulled into the gravitational orbit [chuckles] of the cannabis industry, I really just had to reorient my other companies that continued to operate, restaff them, replace myself, and I've never really looked back. I just cannot express my affection for this industry enough. I love it. I love what we're doing. Global Go is a vehicle to extend all the knowledge that we've picked up in North America over the last eight years, and help transport that to emerging economies even if emerging means a new state in America. To us, it's all really one global industry at this point.
Matthew: Okay. Yes, every other industry seems boring after hearing and this one for a while. It seems vanilla, so I agree with you. Let's talk about the nine trends affecting the cannabis industry. Jump right into the first one, what is catastrophic failure, and what do we need to know about it?
Paul: Yes. We highlighted nine things that I think are-- They're not exhaustive. They're illustrative of things that are, at least from an investor perspective, or a market participant perspective, things to be aware of. Catastrophic failure in the cannabis industry looks like companies going into a form of creditor protection or receivership, possibly being taken over by their debenture holders or their debt holders if they can't maintain their covenants.
We have seen in the last year, even a year and a half, an increase in the velocity of either restructurings, workouts, or just outright failures were companies that were here last year are not here anymore. I don't want to go through a laundry list and name names, but we can definitely see, especially when structured debt came to the cannabis industry and just for the audience, this is highly, quite frankly, fairly expensive debt with very strong security attached to the loan, and usually with underlying warrant coverage. It's like a free carry on, the future of the equity, a guaranteed coupon, regardless of how the equity performs, and if the equity does not perform an ability to take over a company.
One recent example, just to put a name to it, would be iAnthus Capital, which is a company that actually I sat on the board on, a multi-state operator with assets in multiple states, but they recently were unable to maintain or service their debt covenant, and this resulted in them being offside with their lender. Their lender was senior secured, and the lender enforced security in that instance. What that meant for the equity holders, was that the lenders during the enforcement of security took over about 98% of the company, which isn't a catastrophic failure in the sense of the company will continue on, but for the equity holders, it was a near-catastrophic failure.
The impetus behind this is a few things, Matt, as to why this was happening. It's a pairing of one, a tremendous enthusiasm in entrepreneurial startup culture to start cannabis companies. We have had literally tens of thousands of cannabis companies founded in the last five years, which I will argue, as the industry matures out is probably more than the actual amount of companies that are necessary to service this industry. We start with the fact that there are maybe too many market participants for a mature market to absorb.
Then we look at the fact that this is a very capital-intensive industry. It's very hard to grow a meaningfully viable cannabis asset without a lot of capital. We've seen companies in the cannabis industry now collectively raised or individually raised into the billions of dollars. Canopy Growth Corporation, Aurora Cannabis, Cronos, these companies have gone to market and each raised over a billion dollars, in some instances, multiple billions of dollars during their lifecycle. As long as the money is coming into the industry it protects us from understanding who are the more talented operators, who can really swim and who maybe can't swim but has this giant life preserver called unlimited capital.
We went through a period of time where capital, if not unlimited, was not particularly discriminating so I would say that the seeds of catastrophic failure where companies are going to, unfortunately, not have any future. Many will, but quite a few will not. Probably, more will not make it than will make it just because of the number of market participants. It began to assert itself when there was a bit of a bear sentiment into the overall industry, which we can correlate to more or less April of 2019. That's when stock prices started to go down, and that's when capital markets started to seize up a little bit.
You could say that the cannabis industry in some sense, like a lot of startup industries, could be compared to an enormous game of musical chairs with too many players and not enough chairs, but capital is the money. As long as the music's playing, you don't realize that, necessarily, there's not enough chairs or you don't know who's going to not find a chair, but when the music stops, and the music is the availability of capital for everybody, then you will see that there are not enough chairs. Chairs being total addressable market, too many participants, and without capital, these companies cannot continue on.
You can even see right now, Matt, some of the most mature names in our industry, Canopy Growth Corporation, Cronos, Aurora. Now, these are Canadian companies, but they're big names that trade on US exchanges. We're into year seven for these companies. I should know. I was involved with-- I knew them all well from day one. None of them are profitable yet. If you're not profitable for years and years, what you need to keep going is more and more capital, but that capital is not available to everybody, so we are beginning to see that type of market event where there is companies going out of business or going into a form of creditor protection, and I think this will continue. Even though the markets are warming up a little bit again, I still think that this will continue.
What it means for investors or for new founders is to be very aware of the risk, and to make sure you understand not only how much capital you need, but where that capital is coming from.
Matthew: Okay. Let's go to the second trend here, the divergence of medical and rec markets. What's important there?
Paul: Well, that's a really meaty issue. I'm glad that we're going to go through this. My belief is, and I think this is a belief shared by quite a few market participants, is right now we could talk about medical and we could talk about recreational, but the truth is, it's conflated into one amorphous market, featuring both medical and recreational patients. To me, if you look at the budtender, right now, the budtender, in a dispensary is almost playing the role of patient advocate. You have a lot of patients who are new to the plant as a source of healing, and their doctor or their nurse practitioner isn't necessarily strain knowledgeable.
They may not know or even want to know that you'd want to use a bubba kush for this or an OG for that. It's just not traditional medicine where you have approved products, approved by your health authority like the FDA, and you know, "Hey, if you have a blood-thinning issue, this is your medication. If you have an infection, this is your medication." Right now, I will say that both medical and recreational patients are going to a dispensary which is really meant for recreational ultimately.
Where we start to anticipate is that now that cannabis is legalized or partly legalized in many countries, we're finally having the type of necessary medical research or drug development, if you will, that will allow cannabis to go through a conventional drug approval process. We had the first instance of this a few years ago when GW Pharmaceutical got received the FDA approval for Epidiolex, which is a best in class, cannabis-centric remedy for Dravet syndrome, sometimes referred to as childhood epilepsy. This is what we'll call the canary in the coal mine that in no way was it a sort of a sui generis one and done that won't happen again. That's where the medical industry is going to go.
It's going to go into approved targeted formulations that physicians can or nurse practitioners can prescribe with the same certainty that they currently prescribe a whole- pretty much every other approved medication and that the true patients are more likely to seek the certainty of an Epidiolex, for example, versus the uncertainty of, "Hey, I've made a high-CBD low-THC strain, which probably will mirror some of the salutary effects or efficaciousness of an Epidiolex." You would be like, "No, that's okay. I'm just going to go with the approved medication."
I say that like that budtender that I certainly know and love, that budtender, I probably help, but some of those budtenders kids to university in my cannabis consumption career, but it doesn't strike me as overtly medical, and I think when I see patients in need asking a budtender, "This is my symptom--" The budtender is trying. They're not trying to be a disingenuous actor, but they're not trained medical practitioners and they don't have necessarily the body of scientific research to be be able to say with certainty, "If you suffer from neuropathy, this is what I recommend. If you're having early-stage Parkinson's syndrome, this is what I recommend. If you're an ALS patient, this is what I recommend." You're just putting too much burden on a non-trained professional that doesn't have the datasets to prove that.
It doesn't mean that you can't go to a bartender and say, "I'm having trouble sleeping," and they can say, "Well, a lot of my clients or customers or patients have said try this." Let's just say that cannabis is one of those few medications that it's okay to trial and error. In fact, it might be essential because there's virtually no toxicity to it and it doesn't really contraindicate any other medication. It's not like the moral hazard of being wrong is just that it didn't work, not that it caused devastation to your organs or contraindicate with another medication that you were taking.
What I see inevitably is that the medical industry is going to behave like medicine, where there's approved targeted formulations that are proven to be efficacious for whatever condition you're seeking. The rec market will look a lot like it looks right now except that the rec market will really become more or less a giant CPG market with all the CPG playbook, quality of brand and quality of distribution, quality of manufacturing, having an outsized impact upon who were the big winners in a post-prohibition era recreational market.
Matthew: Let's talk about the next to you, which is the end of Canadian domination, the rise of the US. Talk about that a little bit.
Paul: As a good Canadian patriot there's very few things we dominate. To give up any one of them is painful. We want to be the best in hockey, which, of course, we are. I think everyone knows that. All flippancy aside, Canada continues to be, in my opinion, the most important cannabis jurisdiction in the world right now as measured by a whole number of different measuring sticks. Let's start with the fact that it's still, as a federally legal market, the largest federally legal market in the world. The United States if you aggregate all of the states, I'm talking about adult-use not medical, if you aggregate all of the states, of course, you have a larger total addressable market but it's not federally legal and that means it limits its market development.
Canada we're 37 or so million people and so just a large market to be in. Canada was- early we had a commercial medical cannabis cultivation in 2013. We went full rec in 2017 so we've been at it for a while. The big advantage that Canada had is it became the World Bank for Cannabis. Our capital markets were not at all shy in a way that US capital market participants like investment banks have to be because we were federally legal. It meant that there was no risk to jumping into the industry. Our transactional investment banks started, at first, raising money for Canadian companies but very quickly began raising capital for a whole range of companies regardless of where they're from.
If you look at, for example, Matt, the United States and you just do a roll call of the largest public cannabis companies in America. Every one of them has raised most of their capital in Canada using one of the Canadian investment banks, and every one of them is listed on the Canadian Exchange because they're not able to list on the NASDAQ or the NYSE. Curaleaf listed on the CSE, the Canadian Securities Exchange. Green Thumb Industries, GTI listed, on the CSE. Harvest listed on the CSE. Cresco Labs listed on the CSE. MedMen listed on the CSE. I'm just getting going. I think I've made my point. I don't need to name them all.
We became the wallet of global cannabis which allows us to have an outsize impact on the development of cannabis because it's such a capital-intensive industry that if we're the place to list a company-- By the way, I only mentioned US companies. Columbian have come here. Israeli companies have come here. Companies from the UK, from Germany, they've all come to Canada to either list or raise capital. Just by giving us that capital platform it ensures Canadian, I wouldn't say domination but a very strong and enduring role for Canada outside of our own borders. We have the largest rec market. We are the global bank for cannabis more or less. Of course, there's capital in other jurisdictions but we're still where most of the capital is being raised.
Then you look at the third measure which is who's exporting the most regulated cannabis in the world right now? It's Canada. We are exporting close to 20 countries right now, Israel, Brazil, Germany, the UK, et cetera. This is a future look at what cannabis is going to look like. We've developed the most export-minded economy in cannabis right now. We have some reasons why that is. In order to export regulated cannabinoids, the first condition precedent is that you be federally legal. Canada can export to other federally legal jurisdictions. We cannot export to America because it's not federally legal. Conversely, America cannot export anywhere because it's not federally legal.
This global trade in cannabinoids is increasing in frequency. It's allowing Canada to play an outsize role or has allowed Canada to play an outsize role in the development of global cannabis because we're raising the money, we're often exporting to emerging jurisdictions, and we're often taking stakes in these companies. A lot of our larger more well-capitalized [unintelligible 00:26:47] companies have either bought outright or made meaningful investments in a whole range of emerging market participants in other countries. We really have done an incredible job for a small country for the reasons I've outlined becoming the most dominant cannabis jurisdiction.
With that being said, that's not sustainable in the long term. Inevitably we're going to need Canada to always fight above its weight, but for the global cannabis industry to develop, to scale, it's going to require, quite frankly, the United States to take its rightful role as the global center of commerce. In some ways, we're beginning to see that already. Certainly, if you look at the economic performance of the largest US cannabis companies, they're cleaning the clock, at least, currently, of the Canadian companies. They're starting to put up meaningful revenue numbers but they're showing profitability in a way that the Canadian companies have not yet been able to achieve.
I think that as soon as America resolves the dichotomy between the legality at 35 plus states and the federal illegality, as soon as that is resolved then, immediately, America is going to become the most important and dominant cannabis jurisdiction in the world. The same things that made Canada so dominant, America is going to have access to the same opportunities. Import, export, a domicile to raise capital, and the largest federally legal total addressable market in the world, that's what made Canada dominate, and that's what will erode Canada's domination.
When America has the federally legal resolution, all those things will just naturally start to gravitate towards America. Which is not to say that the Canadian industry is going to atrophy or necessarily undergo major compression. It just means that it will continue to play an important role but it won't dominate quite the way it has.
Matthew: What about the FDA and CBD as the next trend? What's important there?
Paul: The important thing to note there whether you're an investor or whether you're a market participant is we're still waiting for the FDA to set out with clarity what you can and cannot do with CBD. Specifically, there's a whole range of issues if you're a farmer. There's a whole range of issues around hot crops, what's the threshold? Is it going to be 0.3%? Just for clarity, the 0.3% is the maximum ratio of THC and biomass in order for it to be categorized as hemp not as regulated cannabis.
There is a lot of uncertainty from both the FDA and the USDA about what the final rules are going to look like. To be specific if you're a grower, a farmer if you will, you need to make sure that you don't inadvertently break federal law because when you tested or when you cured your product, you tested a THC content below the threshold, but as it cured, it exceeded the threshold, and all of a sudden, you might be violating the controlled substances act, which is not what any farmer is expecting when they're growing what they think is a hemp product.
We need to have clarity from the USDA on a whole bunch of issues relating to testing, relating to thresholds. That's when that is fully ideated, it'll be easier for the ag side of the business to understand what they can and cannot do. On the recreational side or the CPG side right now it's not clear to us that you could add CBD to food and advertise it as such. It's not clear that we could advertise it in a beverage, and advertise it as such. Now it's okay to do those things if it's paired with THC.
For example, Lagunitas sells beverage like a hard seltzer, if you will, in California that can be 5 milligrams CBD, 5 milligrams THC. It's a regulated product. It's fine, but I'm talking about where you're trying to be an over-the-counter non-regulated product sold at a whole foods, or a Kroger's or a Ralphs or any other grocery store or on amazon.com for that matter. Then there's still uncertainty about whether, for example, you can add it to food or beverage. We'll just start with that two huge form factors.
I've seen beverages now on the shelves of multiple retailers that don't have any THC in them, or at least they're not putting it on the label. Obviously, there's none if they're sold at mainstream retail, but they're not using the word CBD. They're using euphemisms like hemp extract, for one example. Right now we don't know necessarily whether you will be able to add CBD to food without having to go through a regulatory approval process. We don't know if you could add it to a beverage right now in the absence of THC.
We know that it's okay today to be a topical cosmetic. That is okay. We have clarity on that, but the FDA has been going through a research and an information-gathering phase for the last year or so. We will wait to hear what the final rules in order to say whether you can put CBD in food. You will see that no mainstream grocery retailer is yet putting CBD in food or beverage on their shelves. You'll get some boutique, more cutting edge smaller retailers, not chain-wide, but you're not going to see it in Walmart yet. Just not yet. You will see if you went to walmart.com, you will see a topical, but you will not yet see a vegan protein bar with CBD in it yet because it's not clear.
There's a lot of anticipation that the FDA could either make or slow down the development of the CBD industry, depending upon what actually they will opine on. There have been CBD warnings from the FDA. It should be said. Last year the FDA warned, I think, 17 companies for selling CBD products. Congress and the FDA have squared off over CBD. CBD companies have been sued for false advertising in the United States. FDA has warned that CBD has the potential to harm you. FDA has said that CBD products run real risks. It's just a state of exquisite uncertainty right now as to what will be the final status of CBD as a consumer product good, and it is inhibiting the market potential, I will say so.
When you can actually put CBD in a beverage without having to go through a licensed cannabis rigmarole and just treat it like any other ingredient, whatever else you might put sugar, frankly, or syrup, then you're going to see a huge development in the available CBD products. No doubt you'll see Coca-Cola and PepsiCo and Keurig Dr Pepper release CBD products. You could ask yourself, "Why doesn't Coca-Cola have a CBD product yet? Why doesn't PepsiCo have a CBD product yet? Do they not believe in the CBD industry?" Of course, they believe in it. They can't wati but there's no way they're going to put their global reputation at risk by jumping the gun.
That is the clarity that we're waiting for. That is why you have to be somewhat mindful and respectful of the fact that these rules have not been written yet. If you want to go out and spend $7 million setting up a CBD bottling plant because you'd think it's safe to do that, and you're going to sell CBD beverages, you have to be prepared for the fact that you might not be able to operate that bottling plant in a few months.
Matthew: Good points. How about biosynthesis? I agree with you. That's a big trend there. Talk about that a little bit, if you would.
Paul: Biosynthesis, just to give a little bit of-- If you saw my marks in high school science, you'd be like, ''Please don't explain science to us, Paul'' I'm going to give it a go anyways. It's essentially using non-plant mediums to grow cannabinoids at scale. You can produce, you can use all sorts of mediums. Mold would be one example. I invested in a Canadian company called Hyasynth.
Matthew: Yes, we have Kevin on the show a couple of times.
Paul: There you go. I was actually one of their first investors back in 2014 because I understood immediately what I thought the potential of that could mean because, just using Kevin as one example, the footprint he needs to grow cannabinoids at scale is microscopic compared to having to grow plants. The environmental- the carbon footprint which is going to be very important, because let's face it, cannabis is a dirty environmentally insensitive industry right now. His carbon footprint is teeny tiny compared to what a conventional plant-based cultivator would require to grow plants. This is a really, really important part is their ability to achieve standardization is just something that the plant-based therapies cannot necessarily ever achieve.
The way I anticipate is that biosynthesis is really being built, not for the recreational market, but for the pure medical market. I think that when large pharmaceutical companies are looking to source APIs, active pharmaceutical ingredients, which would make up the core chip into what they're going to produce, they're unlikely to use plant-based cannabinoids because of the reasons I outlined. First of all, standardization is really, really tricky. You can take one cannabis plant and you could, through multiple harvest in a controlled environment, still see variation. That's where you have to test each batch one by one. You can still see why this harvest I had 27% THC, the next harvest I only had 24% THC.
Now in the recreational market that's not a catastrophic outcome, but in pharmaceutical drug development, you can't have that type of variation. You need to have precise standardization. I really see biosynthesis beginning to become commercially viable when we have more approved cannabis therapies, cannabinoid therapies and it's likely going to be a source to buy low cost, low carbon footprint, perfectly standardized cannabinoids. That's the case with biosynthesis is it just makes sense for conventional pharma to want to get out of the plant business.
Now that's not a certainty. Let's just say that Epidiolex, which is the only approved medication is still derived from plants. It can be accomplished, and I'm not saying it's one or the other, but biosynthesis will likely play a role. It could also play a role just in CPG because if it gets to the point where you can have an isolated cannabinoid, that is exactly the same as a plant, that same isolated cannabinoid in a plant. The only difference is that's a lot cheaper and it can be made a lot more quickly. Then it's going to likely also play a role in CPG, in consumer packaged good development as well.
I see that biosynthesis is going to play a role. Now, I also just want to walk that back a little bit and say it's not going to devastate the plant-based economy because I do think there's something near miraculous about the cannabis plant, its sort of entourage effect, if you will, full spectrum. It may be that, despite the challenges of creating standardized formulations, it's still, from a pure efficacy side, could not be replicated precisely in a laboratory. I do think that it's going to take years of development and study and research to understand where is biosynthesis appropriate for? Where are you better off served by the plant?
I think the plant will always be the larger economy of the two but I do think that biosynthesis isn't just like a noble idea that will not be commercialized. It will be commercialized, and it'll operate on a parallel track to the plant-based economy, and where there is improved outcomes, specifically, we'll go to biosynthesis depending on how you measure that improved outcome, and where the plant still provides improved outcome we'll use the plant. Largely, I think you'll see amongst either medical or recreational applications, you'll see companies wanting to have both a biosynthesis, as well as a plant-based cultivation asset.
Matthew: Okay. The last trend is cash remains king. Can you talk about that a little bit?
Paul: I can go back to my musical chair comment which is that this industry is always going to be cash-intensive. Even if you're "cash flow positive," you're still probably going to want to have access to fertile capital markets in order to be able to make sure that if you want to go acquire another asset or if you want to expand meaningfully, your production footprint without dipping into your own account or your own working capital having access to capital, is still going to have a dramatic impact.
To be more specific when I look at a cannabis company to evaluate them, I will do call it a holistic evaluation. I'll look at their growth technology. I'll look at their management team. I'll look at their go-to-market strategy. I'll look at their marketing strategy. I'll do all that stuff, but it won't matter a wit if I don't like the balance sheet because I know that every cannabis company, what they said in their investment deck in terms of how quickly they would achieve revenue targets and what their gross margins would be and when they become cash flow positive, I've yet to see one company actually deliver on what they said.
No, I'm not accusing anyone of fraud. It's excessive exuberance about how great this industry is and how good we are as operators but the old rule, everything is going to cost twice as much and take twice as long is a pretty good mantra to expect. If I see a company, I don't care if it's like we've got the Google algorithm for cannabis, unless they've got cash on the balance sheet, it's very hard to get excited about that company because we know empirically now that if you want to build a large scalable asset, you're probably going to burn through tens of millions, possibly hundreds of millions and in some instances, billions of dollars. I'm not speculating. That's happened already.
This is an expensive industry. It's a problem that it's expensive because it creates access issues and another trend is social equity. I think there's a connection between the paramountcy of capital and as of yet unmet social equity ambitions of our industry. Cash is going to be king for a while, Matt, because there's no-- This is to say in every aspect a brick by brick, [unintelligible 00:43:44] industry and it ain't cheap. It's quite the opposite. It's very expensive. It's not to say that the capital investments are not worth it. We're fighting for a market that's going to be measured in the trillions of dollars. It's very much worth it, but how much did Amazon spend to become Amazon? We're talking about billions and billions of dollars.
The cannabis industry is not much different so that's why these things are connected. Catastrophic failure is connected to a shortage of capital for all the market participants which is connected to the market getting more intelligent about how it allocates capital which, again, buttresses the thesis that those that have capital, those that have cash have almost unique advantage to those that do not. Even if their technology isn't as good, even if their management teams aren't as good, even if their go-to-market isn't as good, the cash levels things up very quickly.
Matthew: Paul, I want to move on to some personal development questions to help listeners get a better sense of who you are personally. With that, is there a book that's had a big impact on your life or way of thinking that you'd like to share?
Paul: Yes. I am a truly avid reader. I'm trying to be like a book a week for a lot of my adult life. It's like, "Tell what's your favorite album." It's a tough question to be honest. I have so many, but I did give this some thought because I didn't want to whiff on the question. I'll say a few from a business book. The book that had the biggest impact on me is a book called The Hard Thing About Hard Things by Ben Horowitz, a well-known Silicon Valley monster. That book, as a lifelong entrepreneur, I've started I think 13 companies in my life. It's one of the few books, and I've read a lot of great business books like Shoe Dog or Bob Iger's book.
I've read really into those business memoirs but I love The Hard Thing About Hard Things because it was one of the few books to really deal with the emotional journey of being an entrepreneur. The insane highs and the challenging lows, the lying in bed not being able to sleep at night, the amazing amount of stress that we put on ourselves, the sort of chip on the shoulder that we all typically have if we're entrepreneurs. I thought that book for me was very personal. It was like, "Oh, okay. It's not just me that has gone through these crazy almost operatic emotional cycles in my career," where I feel like what is wrong with me. Anyway, I said, "There's nothing wrong with me. This is just the nature of entrepreneurship." That book was great.
Another book on a personal level that I have read I think four times now is called Zen and the Art of Motorcycle Maintenance by Robert Pirsig. It's a classic. It's sort of a counter-culture book but I've been a lifelong spiritual questor and that book was just a remarkable elucidation of a western mind embarking upon a spiritual pursuit. It's an iconic book. It's probably well-known to many people but for whatever reason that was one of those books I read. I think I first read it when I was 17 and it took me months to read it. Then I read it again when I was 22, and then I read again when I was 35. Each time I read it, it just exploded in terms of its relevance. In fact, the more experience I gathered the more that book spoke to me.
I've just chosen those two out of-- I could talk books for days out of just an immense pile. I'm a huge believer in reading makes you a better person. You can tell a lot about who you are by the friends you have in the books you read. I've always loved that expression. I switch my reading up. I love fiction. I love literature and I love non-fiction especially business memoirs.
Matthew: What's most interesting thing going on in the cannabis industry apart from what you do today?
Paul: I think, not to circle back on a subject we've covered, but it's got to be the globe-- It is what's happening in the United States in some sense and that we're all waiting and uncertain about how we're going to move from here. The United States cannabis industry is really excited right now. The stocks of the well-known companies have been on quite a run. The Biden bump was a real thing. The ballot initiatives that resulted in six states evolving or birthing programs, all of this is, in some sense, I think the most interesting thing but just to peel that onion layer back a little bit more it's what's going on in global cannabis that's just blowing my mind.
When I entered this industry back in 2012 I just didn't-- I had a very bullish, very almost like pollyannic view of where industry could go but I miscalculated the accelerated development or the expediency in which we've got to such rapid growth. I just see the new countries that are looking seriously at what I call sensible cannabis reform. It's incredible. It's shattering any geopolitical, regional, stereotypes you may have. Pakistan, South Korea, Lebanon, Russia started articulating now.
I'm doing a webinar tonight through Global Go on hemp and CBD in China, Thailand, most of the EU, mostly of Latin America, all over the African continent, cannabis is undergoing now a quick transmogrification from this taboo product to an essential part of a country's health program, a reflection on that it should not be a criminal justice issue, and a meaningful sense and understanding that it can be a source of great economic development.
We're talking about better outcomes for all stakeholders, better outcomes for patients, better outcomes for consumers, better outcomes for the government in terms of now being able to capture, through private enterprise, high paying or decent-paying jobs, taxes, quality assurance. It's just the speed that cannabis is unfurling across the globe that is to me the most interesting thing going on. Now I'll just take that a step further to say, what's going on in psychedelics is very much the long tail of what's going on in cannabis.
I'll say that cannabis was the battering ram that knocked down the partition to re-evaluate and rediscover plant-based medication. We knocked that door down and now rushing in right behind us, is the psychedelic industry, which is going to have transformative impact on mental health in the world. That is staggering to me how quickly the psychedelic industry is developing and it's in large part because the cannabis industry laid down the tracks, and by laying down those tracks, we should lubricate it, reduce the friction for the psychedelic industry to develop. It's moving in some sense more quickly or as quickly as the cannabis industry.
Those are the two things for me as a long-term market participant that makes me go like, "Holy blank, this is just what we dreamed of, what we imagined, what we hope for, is actually happening in the here and now." It would be just the globalization of plant-based therapies led by cannabis, but with others following them, that is electrifying me at the moment.
Matthew: Thanks. Here's the Peter Thiel question for you, last one. What is the one thought you have that most people would disagree with you on? It can be about anything.
Paul: All drugs should be decriminalized.
Matthew: It makes a lot of sense. Portugal's done that. I've been over there and the sky's not falling.
Paul: Portugal's done it. Oregon's on the verge of doing it, and I think that we have to understand-- When I say all drugs should be decriminalized, I mean, the use, not necessarily the sale of. I do think that there is moral hazard associated with certain street-level drugs, but I do think that the mistake we've made in multiple economies is treating a drug user as a symptom to be responded by the criminal justice arm of government rather than the health arm of government.
Using Portugal as an example, we want less people to die from opiate addiction than are currently dying, and these numbers are staggering. As you probably know, more Americans die of opiate overdoses in one year than died in the entire Vietnam War. It's crazy statistic. The way to measure the success of any government regulation around, say, opioid abuse, starts with not how many people are in jail, but how many people died, and that if you can lower the amount of people that died by decriminalizing it and treating it as a health issue, which is largely what we do in Canada. We have methadone clinics in Canada, for example, that are legalized. I'm going to say that's the superior outcome.
Addiction should not be a criminal act. It should be if someone is addicted- and I'm not advocating everyone should do all drugs all the time at scale, far from it. I'm saying that a criminal justice response is blunt when we need something more subtle. I'm not opposed to criminalizing drug cartels, moving crystal meth across borders. That's not what I mean by decriminalized. I mean, going after the user is not really solving any problems. It's just, in a way, criminalizing people that need a healthy response. That would be, I guess, my one thought that most people would disagree with.
If I had a second one, I would say we're living in a simulation, [chuckles] like Elon Musk. What we think is reality is not actual reality. I'm very comfortable saying that. I don't know if that's controversial, and most people would not agree, but I view that we are living on some form of a simulation. Unnecessarily someone else's video game, but something like a simulation, where we're getting a mutated version of what is real. Those are my two so-called controversial most-people-would-disagree-with-me thoughts.
Matthew: Until Elon Musk said that, that there really wasn't a lot of places where you could talk about that without it seeming like some sort of, I don't know what, like people wouldn't take that seriously. Now we can actually talk about that and it is compelling in many ways. He calls it a simulation or there could be some other maybe name for it besides simulation, but you're right, a lot of more people jumping on that idea, and I think it's maybe got some merit. It's hard to describe it while you're in simulation, right? Unless you're- it's like Ready Player One.
Paul: It's like Ready Player One, exactly, that Ernest Cline book. When you're in a dream, you're pretty convinced the dream is reality, during the dream. Then you wake up and you say, "Okay, that was just dreaming." You could just say life is a dream that we haven't woken up from.
Matthew: Right. Row, row, row your boat, merrily down the stream. Finish it, Paul. I'm waiting.
Paul: [laughs] I can't. I'm laughing too hard.
Matthew: Okay. Paul, as for the listeners that want to connect with you, and learn more about what you're doing with Global Go, how can they do that?
Paul: They can reach out to me. I'm going to give my Gmail because the Global Go handles a mouthful, then I'll switch you off. Life is but a dream. I will just say that, [chuckles] to your point, merrily so. Everyone, ready. It is my name, email@example.com. Look forward to hearing from anybody and everybody. I love to bring an open tent and most people that know me know that I will pretty much try to talk or meet with as many people that want to talk with me.
Matthew: Paul, thanks so much for coming on the show. Enjoy your maple syrup in the simulation, and we'll hope to connect with you, again, soon.
Paul: Thanks, Matt. Best wishes to you as well.
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 firstname.lastname@example.org. We'd love to hear from you. Please do not take any information from CannaInsider or its guests as medical advice. Contact your licensed physician before taking cannabis for using it for medical treatments. Promotional consideration may be provided by select guests, advertisers, or companies featured in CannaInsider.
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Thanks for listening and look for another CannaInsider episode soon. Take care. Bye-bye.
[00:58:03] [END OF AUDIO]
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
[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
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 email@example.com.
Matthew: Alex, thanks so much for coming on the show. We really appreciate it and good luck with everything you're doing.
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 firstname.lastname@example.org. 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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