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Cannabis businesses need to understand what is selling in dispensaries so they can make informed decisions.
Cy Scott, co-founder, and CEO of Headset.io delves into how to get this data and use it to make actionable business decisions now.
– What is selling in cannabis dispensaries now
– How to properly use data to make informed decisions
– Why it is better to create a new market category than be a fast follower
– Insights as to how the market is evolving
– Career advice for entering the cannabis industry
>>> Get This Podcast With Cy on your iPhone or Android HERE
We also cover some cannabis items that are hot sellers right now.
Learn more at https://www.headset.io/
As more and more capital floods into the cannabis space, it's becoming increasingly important to make data-driven decisions, to chart your course, achieve product-market fit, and ensure profitability. To help us understand how cannabis businesses are leveraging data, I'm pleased to welcome back Cy Scott from Headset.io. Cy, welcome back to Canna Insider.
Cy: Thanks Matt. I'm happy to be here.
Matthew: Where in the world are you today?
Cy: So today I am in Seattle, Washington, which is where we're actually headquartered.
Matthew: Okay. And I'm in Edinburgh, Scotland and I think it's about 40 and rainy here, so we probably have pretty similar whether, I imagine.
Cy: Yeah, very, very close. We're definitely in that time of year where it's a pretty cold, pretty gloomy.
Matthew: Yeah, except it's 3:00 here and it's almost completely dark.
Cy: Oh, my gosh, yeah. We get dark about 4:00, so we're right behind you.
Matthew: Okay. Okay. Now tell us what Headset is at a high level. You were on I think once or twice before and we talked about Leafly. And if anybody else wants to get a backstory on Cy and everything he's done, please check out past episodes. But today we're gonna talk about Headset. Can you give us an idea of what Headset is at a high level?
Cy: Sure thing. So Headset is a data and analytics company designed for the cannabis industry and we turn retail data into what we say is real time insights. So we look at a lot of retailers across a variety of markets. And we aggregate and anonymize all the transactions. And we paint a picture of what's going on in the industry. So if you're a product manufacturer, an investor in this space, or just an interested party into the cannabis industry, you can see the competitive landscape, really understand a brand positioning, and identify opportunity in the market.
Matthew: Okay. And so you were a co-founder of the popular strain and cannabis culture app and site Leafly. I know you exited that business to privateer holdings. And you've transitioned to become the CEO and co-founder of Headset. You're definitely an OG in this space. From your vantage point, how has the industry changed? I mean, let's say the last five years, what's your big...if you were to sum it up in a few sentences for people that don't understand where it's come and where it is now?
Cy: Sure, yeah. We started Leafly back in 2010 and it definitely was a very different world. We were based in southern California at the time and had access to a number of dispensaries. And we saw this proliferation of dispensaries happening. But when you'd walk into a shop, it was really a lot of dried flower and jars with labels. You didn't really know where it was sourced or if it was tested and so on and relatively simple. Packaged goods didn't really exist or maybe one or two at the time. And you fast forward to today and it's just unrecognizable. We're in a world with, you know, everything is a packaged goods, a good item in the cannabis space. You're seeing interest coming from, you know, not only people that have licenses. But we get, are asked about our data from, you know, traditional CPG companies or alcohol companies, finance companies. So a lot of people are interested now. So it's very different on the level of sophistication and interest.
I think another big difference is the number of states and countries at this point that have legalized. You know, at that time it was strictly medical in a number of markets like California and Colorado and Washington. But in 2012, you know, with the legalization, we saw this incredible wave of new markets opening up. So that's been pretty surprising, at least the pace of adoption. You know, we always knew that this was the direction it was gonna go. That was our, you know, thesis originally with Leafly. And we're surprised at actually how fast it is moving.
And probably the last thing I would say is, the amount of investment dollars or capital that's poured into this space. With Leafly, it was really hard to raise money. Not a lot of people saw the opportunity or if they did see the opportunity, they were hedging a little bit wondering if it's just a California thing or would only be medical. But you fast forward to today where you have, you know, what's going on in Canada and the number of states that have legalized. And you're seeing a big outpouring of investment dollars coming into the market, which is really great for the space. You know, it really helps these operators and groups like ourselves scale up pretty rapidly.
Matthew: Okay. And remind us how does Headset collect data? How does that mechanism work?
Cy: Sure. So we work with a number of retailers in a variety of markets. We connect directly to their point of sale system. We, in exchange, give the retailers a lot of great analytics about their own operations and including bench-marking data, once we have enough retailers on the platform. So the retailers are really motivated to better understand their operations, whether it's inventory carry, you know, sales trends, how their bud tenders are performing. And we make it really easy for them to dig in, whether it's top line numbers or really get down to, you know, a particular product and understand what's going on. The Headset interface is really good for that.
And then what we do is we aggregate all of that, all those retailers, in a particular market and we normalize the data. So when different retailers are selling the same product, we have to do what's called product coding or normalization. And then we can paint a picture of what's going on in the market from the skew level or the individual product level through the brand to the segment and category and so on. So it's all real time. Given that we're connected to the point of sale, so we can see on the platform, you know, what's happening. Right now while we're having this conversation and things are transacting, it's all getting normalized in the system and available for our customers.
Matthew: Just on the logistics of that, is that a difficult thing to get that all the information from the dispensaries? I mean, it sounds like it's or it's just a huge, huge, Herculean task. Is it or have you made it easy somehow?
Cy: It's definitely difficult. You know, we've tried to make it easier over the years. And there's a lot of things that we do like working with partners in markets that can help us get adoption, developing kind of growth hooks into the products themselves to make it easier for groups like vendors to invite retailers to the platform. So we've done a lot to accelerate adoption. But you know, when a new market opens up, we definitely, you know, have to reach out to the retailers, understand who the license holders are, start those conversations. So it does take some time.
And then once we do have the retailers, the product coding effort is pretty significant. We've also developed some pretty clever systems that can do it in real time at this point. But in a new market, you know, the machine learning, it doesn't have the training data it needs and we have to kind of train the system. So it definitely is a challenge. I think that, you know, we've solved it pretty well at this point. But, you know, lots of room to grow. And as new markets open up and in the US and even internationally, you know, we kind of have to continue that adoption, something like what we're seeing in Canada right now.
Matthew: Okay. So you started in your home state of Washington and then the second state was California.
Cy: Right. Yeah. The second state that we went live in was a Colorado and then, yeah, Nevada then California. California we just launched this year, you know, with the new adult use market. So, you know, it's been a little bit of a slow start for that market. You've probably seen a lot of the headlines with licensing issues. And then in July they have the new regulations on package size and potency, which required all new products to be put on the store shelves. So it's getting there certainly as a market. But we wanted to wait until things normalized a little bit before reporting on it, just given the volatility of that market. We have retailers in a number of other spaces, including medical markets, like Illinois, for example. But we're not providing the wider market intelligence service in those markets quite yet. But that'll be coming soon in 2019.
Matthew: Okay. When you talk to brands or businesses that are making decisions with your data, what kind of insights or aha moments are they having the first time they look at it that they don't expect?
Cy: Sure. I think a lot of our customers are the brands, the product manufacturers, the processors. And they really like to look at the data to understand the competitive landscape. So they'll look and, you know, identify some of their competition. They'll look at their competition's assortments or product mix and really, you know, be surprised on, you know, sales numbers for certain product lines that they carry. So I think that's a pretty big use case for us. When I ask about kind of like, you know, what type of aha moments or surprises to our clients, they also mentioned just the frequency of product introductions. Given the real time nature of the platform, we have a dashboard that is a new products dashboard.
So as soon as a new product sells in the market, it gets flagged and displayed on this dashboard and you're seeing upwards of 10 new products a month, you know, depending on category, depending on market which is pretty, pretty frequent, very frequent. It's like if you're in a grocery store and if you walk down the cereal aisle and you saw 10 new cereals, you know, every month it would be a pretty surprising. But in the cannabis industry, just the pace of growth, the pace of new brands coming to market, everyone's trying new things, new form factors. It really does surprise people when they see, you know, how many products are being introduced at any given time.
Matthew: Now let's go around some of these geographies where you collect data. Can you tell us some of the most popular products in the biggest markets you monitor?
Cy: Sure. You know, I would say kind of in general a lot of unit sales go to more inexpensive products, which is not that surprising I suppose, but things like single grand prix roles that might be, you know, under $10 retail price. You know, seemed to move a lot of volume in kind of a variety of markets. And every market is a little different. Although, you know, most markets have, you know, roughly 50% of market share goes to flour based products or just flour, I should say, you know, roughly 10% goes to edibles and so on. But I think that yeah, unit volume you're seeing, you know, a lot of inexpensive products, whether they're throwing at the checkout or point of purchase or people are just going in, you know, to buy them because they're relatively inexpensive. We do see that with things like prerolls.
But then when we look at kind of revenue and total dollar sales, some surprising things are like in Washington, the state of Washington, I'm the number one selling product by revenue is actually a topical. It's a THC and CBD based topical. It's, yeah, it's a higher price point item. I think it retails for around $50. So that does attribute to it, but it is pretty surprising given the top schools are relatively small market share. But this particular product just seems to really resonate and that's kind of what you're seeing in the news and the news cycle and people talking about CBD, whether it's hemp-based CBD or THC and CBD. There's just more and more interest in things like that. So that's pretty surprising when we saw that.
Matthew: Okay. And I understand you have some demographic data on California. Is there anything you can tell us about the demography of California cannabis consumers?
Cy: Sure. So we get demographic data from loyalty programs or in medical markets. We're able to see, you know, gender and age and we can overlay that across any transaction data we have. So it does give us a good sense of what's going on in the market. So it's a little different than getting demographic data from something like a survey. We get it from the actual customers at the location, so nothing identifiable. No, I'm what they call PII or Personally Identifiable Information. But with gender and age we can kind of paint a nice picture of what's going on in the market. I think in general, you know, what I would say about, you know, California, some interesting trends as we're seeing a lot of growth in the generation x or the baby boomer share market increasing. When the market started, it was a lot of, you know, millennials.
So a younger demographic for whatever reason, maybe more has a higher acceptance rate of cannabis, more willing to go to the stores. But we're seeing that market share of the generation x and the baby boomers continue to climb. So I think that just kinda shows it's getting more and more normalized. Cannabis is not some fringe product anymore or just something for a younger audience. So that's pretty exciting and integrate trend. You know, when we look at a gender breakdown, it's still skewed towards the male gender. When we look at male to female, it's still about two to one. So you know, 66% of sales going to men and about 33% to women. You know, that's relatively flat that it's like an aggregate, but there are certain segments where a women purchase products a bit more than men. Things like topicals for example, where you're seeing a little more of like a one to one ratio. But when we look at an aggregate, it's about two to one. So you know, we continue to watch that and we can layer those over different brands and different products, which is great for our customers to kind of understand when they look at marketing campaign opportunities or how they position their brands. Kind of knowing the demographic data is critical.
Matthew: Yeah. I wonder how that's gonna turn as there's more beauty and wellness focus products in dispensary's. I mean there is some wellness products already, but just to kind of more, more general, more people coming in for that reason. It should be interesting.
Cy: Exactly. You know, I think that we're gonna see it normalize like any, any industry where you're going to see a little more of a one to one ratio. You're gonna see a broader mix of audience as far as age groups and I think that much like alcohol, you know, people are buying it, whether they're baby boomers or 21 years old. Cannabis will be the same mix once things kind of settled down and it continues to normalize, which we see happening every day.
Matthew: And any initial comparisons between Canada and the US? I know there's a lot of things different. Something's the same. Any thoughts about Canada? How do you think about it when you think about in terms of the purchasers purchase and they're different from US consumers?
Cy: Sure. Canada is an interesting landscape. There are some nuanced differences between what we see in the US, particularly given that it's run by Health Canada and they started with their medical cannabis program out there. The product form factors are limited to only flour and oil. And oils in Canada as is almost like a tincture. And so you don't have things like vapor pens, concentrates, you know, a lot of the form factors that we see in the US. And so that's a big difference. I think another thing that's quite different is the number of brands that are out there. There's a, you know, a fat 100 LPs which are the processors in Canada. And they have, you know, a number of brands underneath each LP. But I think that the brand landscape is relatively limited compared to something like Washington where, you know, there's hundreds of brands out there.
And so that drives some nuance. And then I think purchasing is different as well, depending on the province. You know, you see a lot of these provinces run by the provincial liquor distribution boards. And so they're actually responsible for distribution, but also for sales to the end consumer. For example, in Ontario, everything is sold through the Ontario cannabis store. There are no brick and mortar shops. It's all ecommerce-driven, so you go online, you order and it gets shipped to your house. And it's brick and mortar will be coming later on in the year where in the US, you know, everything is brick and mortar. In California, there is some ecommerce, I kind of say that with quotes around it, given that you can go online, purchase products and then it actually gets delivered to. So it's more of a delivery service. It's not kind of like traditional ecommerce, like the Amazon model. So you know, we're still working on collecting a lot of that data. We worked with a number of private retailers. Right now we're talking to a lot of the liquor boards right now to get access to the transactional information.
Some assumptions we can make, we think that the age breakdown is gonna be pretty different because there's less of a barrier to entry to going into a store. I think that, you know, there's still a bit of that stigma. There's still a bit of a fear of walking into a cannabis retailer. People don't wanna look like they don't know what they're doing and it can be a bit overwhelming if you ask any new consumer that goes into a cannabis shop for the first time. They're just overwhelmed by these different strains and different products. And so going online, doing research, checking out, I think it's a lower barrier to entry so we're probably going to see an older demographic purchasing products. And then the product mix, you know, it's gonna obviously be very significantly flower-driven just based on the number of products that are on the market right now.
In oil is a small amount of market share, especially given what we see for like oil type products in the US. So, you know, it's early days, again, kind of like California, it's a bit of a rocky start. You know, we're in November here, tail end of November. They've been online for about a month. We're hearing about supply chain issues, you know, people not getting products, a lot of private retailers not being able to open up. But it's not uncommon from what we see in other markets. So we kind of just have to be patient, hang in there and see how it unfolds and hopefully, you know, in the US we can learn a bit about how they're successful up in Canada and then bring some of that ideas down here, including things like the ecommerce model, which is pretty exciting.
Matthew: So you've dispensaries that are customers, you have brands that our customers. Who else is the ideal customer or prospect for Headset where they want this data and it helps them grow their business?
Cy: Sure, sure. So in addition to the brands, the product manufacturers and the dispensary's in the cannabis space specifically, we see a lot of distributors that are interested in being customers or our customers, as they look for brands to target for their distribution work. You know, you can go onto a Headset and if you are a distributor and you wanted to identify the top performing brands to potentially carry as part of your distribution network, it's pretty quick to go in and see who's performing really well in the market. So distributors subscribed to really understand that.
You know, more recently some very exciting trends for us here at Headset our end for the industry I would say at large is just more interest from the financial sector. So a lot of hedge funds investors in this space that are becoming subscribers, really looking at the data, you know, as they make investments, that's a good way to do a due diligence on a brand, a to see how they're positioned in the market. You know, a lot of brands will say, how are the top brand in the market or our brand really resonates with consumers and most likely it does. And it's good way to double check in Headset to see, you know, how are they positioned? What are the competitors look like and so on. So a lot of financial sector clients coming in.
And then also a CPG or Consumer Packaged Goods. So I think given the changes in Canada, um, I think this is really what's driving a lot of bats is, it's giving a lot of traditional CPG companies a bit of a safety net to be able to look at the cannabis space as an opportunity for growth for them. So they're subscribing to the data to better understanding of form factors, the type of brands that seem to be resonating with consumers as CPG companies that, you know, like make topicals or make lotions of looking at, well, what is the impact of CBD-based topicals on my business or maybe they're an alcohol brand and you're looking at making a dealcoholized beer that has cannabis instead. You know, you wanna look at the beverage market beverage segment and see how they're performing.
So that's been pretty exciting trend of just this wider audience of parties that are interested in the type of data we have. And I think, again, it's just really good indication for this industry, you know, it used to be very much, you know, Canada's Canada, Canada's the only cannabis operators, but now there's a lot of interest coming from outside. They're not customers per se, but also the media, the media and the press is very interested in our data. You know, we work with them like we just did an analysis for a group on Green Wednesday, which is right around the corner of the day before Thanksgiving, which we've seen is the second highest sales day in the year, right behind 420. And so the media is very interested to kind of back up some of their assumptions about the market or as a position a certain claims about the market. They can look at our data and, you know, back it up with numbers. So it's kind of our audience currently. And, you know, it's really exciting to see the growth there.
Matthew: Let's talk about the data a little bit more. So if there's an optimal way to use the data and then there's an optimal way. So if I were to jump into the data right now, let's just say hypothetically, gummy bears showed he's very popular and vape pens should it be very popular. I'm a new brand, I've just raised some capital and I wanna make a vape pen or a gummy bear because they're selling well. So I, you know, I'm kinda, I'm just following the market saying I, you know, I wanna sell what's selling. But it doesn't necessarily tell you everything and it might not be the best bet because it doesn't take into account brand loyalty. If I buy a gummy, I'm only gonna buy them from this one band brand or they have a really strong loyalty or it doesn't tell me if the market's flooded with vape pens, were there so many choices. I'm just gonna go with what I went with last time because I don't. I have decision fatigue. So let's say we don't want to do that. We wanna stay away from the me too stuff. What can you say about creating a new category or a new sub category? So, for example, a, perhaps a dissolvable gummy or a hangover type refreshing and revitalizing vape pen that can perk you up after a late night. How do you feel about this idea of creating a new category or a new subcategory?
Cy: Sure, sure. I think Matt, you need to go into product development. Those are some good ideas actually. Yeah, totally. You're absolutely spot on. I would say that, you know, there's still plenty of opportunity and things like gummies and vape pens, by no means is the market I'm settled. By no means are the players that we see today gonna be the players that are the brands that will last 100 years from now on. But you're absolutely right in that it will be very competitive. So if you make a new company, you put it on the store shelf, you're gonna really one. I mean, to even get the store shelf space is getting more and more difficult. There are so many brands now that there's finite retail space, these retailers have relationships with these product manufacturers at this point. And it can be really hard for them to swap out a company that has known sales for your gummy unless you can really differentiate it and whether that's through price or form factor or some positioning in the market.
So, you know, there's still a lot of growth and things like gummies and vape pen, still a lot of opportunity, but it is potentially gonna be a challenge to go in and fight head to head with some of the groups that are there have made headway, whether that's through their brand loyalty for the consumers that they now or just working with retailers to convince them to even carry your product. So yeah, moving into a new category or subcategory or developing a new segment is absolutely something that we see happening. We like to joke that it's like people are throwing everything at the wall to see what sticks because we don't really know. And so you know, if you can consume it, you can probably infuse it with cannabis in some manner. And so there's, there's plenty of opportunities for the hangover type of product or a dissolvable gummy or a chewing gum that's, you know, low dose five milligram or what have you.
And we do track hundreds of sub categories and there's some that are, you know, pretty funny and pretty interesting, that are surprising I would say that are out there. So yeah, I would definitely encourage that. You know, consumers are looking for new form factors or retailer might be more interested in carrying your product if it is something that they don't currently carry. And it's a Greenfield is wide open. You can go out and not have any competition in that space.
Matthew: I gotta think it's gotta be harder for dispensary owners to just deal with coming in and triaging these opportunities of all the different people wanna be on their shelves. It seems like it's probably more important now to be vertically integrated where you're, you know, you're controlling your whole supply chain if possible because you know, you really don't have any sway unless with the dispensary owner unless customers are asking for your product by name. So some tough challenges there maybe for certain brands and things that don't have brand recognition yet, but I'm sure the creative ones, we'll jump that hurdle with ways we kinda just talked about there. So any interesting partnerships or things coming up you wanna talk about?
Cy: Sure. We've got a lot actually coming up by the end of the year. So this is, I guess we've got about a month left in 2018, so I would say stay tuned for some exciting news there. You know, what's really exciting is these partnerships are with groups that are non-cannabis vertical operators that are coming into the market given kind of the new landscape with countries like Canada legalizing. You know, they are very similar to us in the market intelligence space. So some exciting stuff to talk about soon, but a little too early to announce. So stay tuned, watch for the PR to land before the year's out.
Matthew: Great. And Cy, I get emails everyday from college students, professionals already in the workforce and they wanna transition to the cannabis space. And I give kind of general information, but sometimes I feel like I'm not giving enough value back. Do you have any examples of a candidate or someone you saw that made a transition into the industry successfully that maybe you could highlight to tell people, you know, just an example of how it might be done successfully?
Cy: Sure, sure. Yeah, I think again, not to keep picking on Canada, but we've been spending a lot of time up there. We have an office in Toronto at this space at this time. And what's really exciting about Canada has given the, the lack of the federal overhang. Like in the US we have the issue of it being a schedule one substance. So it kind of precludes a lot of people from more traditional industries jumping in just because of the risk or potential risk. In Canada, you know, that that doesn't exist as much. And so at this point, you know, in Canada we work with a lot of the LPs, the brands in the space and it's, it's interesting when you're sitting across the table with some of these large, large brands, whether it's the canopies of the Afri is or they were ours. The other side of the table is full of people that come from a beverage alcohol. So a lot of the beer companies, the Molson Coors of the world and they've jumped over and we kind of joke like, who, I don't think anybody is left in Canada and making beer at this point. I think everybody's jumped into cannabis.
So I think that, you know, a variety of experiences in that world, whether it's alcohol, whether it's CPG, I think is very beneficial to the cannabis space. I'm also seeing a lot of operators like project management, you know, people that are used to, you know, fine tuning operations. I think that in this industry, operations is kind of a huge opportunity because a lot of the cannabis product manufacturers, you know, started as, you know, growers or, you know, had a recipe and now they're scaling up and looking at, you know, multistate operations and they need support to be able to do that. But, you know, that's through my lens and kind of the world that we're in. I would say that, you know, no matter what you do, I think there's a huge opportunity in this space for you. It's just finding the right company to jump into.
Then I would encourage everybody to do it. I think that, you know, given we've been in it for eight years at this point, which, you know, eight years is some time, but in cannabis years it feels like forever. And another eight, I can only imagine, you know, where we're gonna be or you know, actually have trouble imagining because I think it's gonna be so much beyond what we're seeing today. So, you know, I like to say there's never been a better time to be in cannabis. I've been saying that for probably the last five years. So, you know, it continues to get better and better, but I think that now is definitely the time to jump in.
Matthew: Yeah. And I feel like the risk is largely gone, whereas a few years ago still felt kind of like phrase this is a little bit risky. You leaving something behind. Now it's just, I feel like that's gone. You know, the launch sequence has been initiated in this thing is taking off.
Cy: I think when we started, yeah Leafly, you know, we would always caveat when I would explain to neighbors or friends, you know, I would say, or even family are in the cannabis space, but we don't touch the plant or we're just data.
Matthew: You upon it. No, no, no, no, no, no, no Jack, no, I'm not. I pass on grass all the time.
Cy: Or look at the app, you know, it's this mainstream app because I think there was a lot of that stigma and people are afraid to have things like a cannabis on their resume. But today I think when you say, you know, I'm in the cannabis industry, people look at you with a bit of jealousy, like, well, how do I get in, you know, this, I wanna jump in, where do I go? And I think it shows that you're forward thinking and uh, you know, ambitious and risk taking. So yeah, I totally agree with you. It's definitely normalized at this point.
Matthew: So Cy, at this point in the interview, I like to ask a few personal development questions to help listeners get a better sense of who you are personally, and you're gonna get a couple extra because it's just because it's you.
Matthew: So here we go. Is there a book that has had a big impact on your life or way of thinking that you'd like to share?
Cy: Yeah, you know, I read a lot of I guess nonfiction certainlyand fiction, but I'm a pretty avid reader. I think reading is just the best, fastest way to learn from a lot of smart people out there. You know, some that I guess kind of where we're at today, you know, a more recent book that really has been resonating with me enormously is the ''High Growth Handbook,'' by an individual Elad Gill who's a very well known startup individually has been in Silicon Valley for a number of years. But there's something about this book, at least for the point of our businesses in. So, you know, we're in this kind of inflection point going from early stage to growth stage.
It's kind of where you've got product market fit, you know, you've got a validated product, you have customers and you're now it's all about kind of scaling it up and all of the things that that entails, hiring new people, you know, dealing with dynamics internally, you know, things like fundraising. So I think that that one seems to be just kind of like a playbook for where we're at right now. I wouldn't necessarily recommend it for everybody if you're just starting a company. It's probably not totally relevant. I think it's a good window into your future. But for where we're at right now, it's like every chapter it's like written just for me, I feel like, so it's called ''High Growth Handbook.'' I would really recommend it for anybody in the startup world. You know, additionally, a good startup book that I recommend that is recommended by probably everybody is ''The Hard Thing About Hard Things.'' You know, that...
Matthew: By Ben Horowitz?
Cy: Ben Horowitz exactly. That one is I think also a good kind of reality check, you know, this is not even our second startup, myself and my cofounders, you know, weekly being the early certainly, but we had a number before. And to say it's a hard thing is an understatement and I think it's a good way to kind of brace. So you're not surprised by a lot of things. So I definitely encourage that. You know, so those two books are great if you're kind of in this world and I'm currently reading ''Blitz Scaling'' in the messy middle. ''Blitz Scaling'' is Reid Hoffman, so the founder of LinkedIn and it's really about just kind of scaling your operations up quickly to get that market share and just the best practices to do it if there are any best practices that also. So a lot of kind of startupy businessy books, but it's kind of nice to have just to kind of help guide us through it because even though we've done it before with Leafly, you know, it's a different business with headset, different dynamics in the market and so new challenges all the time. So having books like that are invaluable.
Matthew: Is there a tool besides Headset that either you or your team use that helps with your business or productivity?
Cy: Sure. You know, we're all concentrated more or less than in Seattle with the exception of our Toronto office in some field reps essentially in markets like California and Colorado. So we definitely like using Slack, which is a communication tool. You know, I'm sure most companies are used to using that. You know, to keep everyone on the same page, I would encourage operators to develop kind of not a Wiki for say, but some sort of knowledge base where people can share their information in the organization, whether it's documentation or just project management. So we use a service called Quip that's Q-U-I-P. We really like that. It's kind of like Google drive, very similar but a little more bells and whistles to make it easier to communicate, to have kind of more dynamic documentation.
So that's been pretty helpful for us to keep everybody on the same page, especially as we scale up, you know, you kind of lose a lot of that tribal knowledge and the organization. You can't ask everybody for everything. So if you can go to one place and kind of figure that out, that's been great. But I can go on and on. We'd like to use a tool called Intercom on the platform. Intercom is great for customer engagement. It really gives us a good sense of well, one, it's a great way to connect with our audience, so if someone needs some help, they can just jump on Intercom and start messaging us, but it also provides us some great analytics on usage of the platform so we can kind of identify, you know, who's a power user of the platform, who hasn't logged in a little while and really helps us with things like customer retention and just really understanding our customer base. So those are some three tools, top of mind, you know, there's probably hundreds of others that we use certainly, but, you know, those are three of the big ones that really helped push everything forward.
Matthew: Well those are great. I got two more questions for you. You've given me a lot so far, but we got two more to go. So I'm gonna ask you a Peter Teal interview question. What important truth do very few people agree with you on as it relates to the cannabis industry or all in general?
Cy: Sure. That's a tough one. I think that I'm tough one. That's probably why it's a Peter Teal question. You know, I think, I guess I would have said, you know, that the cannabis industry is something like any CPG industry will turn into that. You know, I think that I, you know, at this point I would say that probably a majority of people would agree with me on that maybe a couple of years ago less so. I think when we were starting Headset, I think that. You know, people were questioning or would question is there really a need for that, you know, sales are always up and to the right with cannabis in. Do people really need that level of data. Or you know, maybe more recently or since the beginning of headset, you know, our operators sophisticated enough to look at numbers. And I would say that, you know the truth is, yeah I do believe that they are sophisticated enough or they do recognize that they need to look at numbers, whether they're a mom and pop a hole in the wall store. That gets enough information out of our daily email summary that comes out to them every day based on their operation or if they're, you know, wanting to dig into their inventory to identify the performers, you know, I would say that these, these operators do look at the data and you'd be surprised you don't need to be a multistate operator with a staff of 100 and having analysts full time. There are people in this space are pretty much everybody in the space recognizes that that data is important.
And know if that's just a big sea change that's happened with the era of big data and metrics and analytics and you know, I think something in the water, people recognize that, but they wanna stay competitive. They need to stay ahead of others. And so looking at the data is important. And so I think that would be the truth that people, few people agree with me on that, you know, even the smallest operators need good data to drive their businesses, which is very much true from what we see from our customer base.
Matthew: Last question Cy. If you had to go to a dispensary this week and purchase $100 in cannabis products as gifts, how would you spend the $100 and who would you give the gifts to? Don't have to give names, just relationships.
Cy: Sure, sure. Yeah. Certainly can't give to myself, I assume. So I think it's a great question, particularly for this week or you know, given that we're moving into the Thanksgiving holiday here in the US and in green Wednesday as it's coming to be known as such a popular day for sales. I think kind of in the lens of this week, I would purchase most likely and edible, probably some, a low dose product, something, you know, five milligrams per serving or even less and something with a really nice packaging, really great brand positioning in the market. And I say that because I would take it to, you know, Thanksgiving dinner where, you know, potentially I'm gonna meet some new individuals and you never know their opinions on cannabis. Most likely they're, they're pro-cannabis. But it's a good way to introduce people to the market without, you know, to kind of de-stigmatize a bit where they can see a product that looks like something that they would purchase that at whole foods that they can try without any risk of consuming too much cannabis or having something to potent, and, you know, really, uh, hopefully to help change their mind. So I think that that's the route I would go. So probably an assortment of edible products, low dose things like mince, things like single serving cookies that, you know, come a nice packages that I think would resonate with a Thanksgiving dinner crowd.
Matthew: Good. Very portable stuff. I like that exact. Cy, as we close, tell listeners how they can find out more about Headset and learn about the data and the services you offer.
Cy: Sure, sure. So head over to our website at headset.io. You can learn about the different products that we have, whether it's Headset Retailer. Insights, which is our market data product, and a headset bridge, which we didn't really get into, but it's pretty interesting if you're a product manufacturer. We also published a best seller lists that's refreshed daily, so it's the top 10 products in the markets that we do track by category. So if you wanna dive in and see, you know, who are the top 10 pre roll or what are the top 10 payroll products in Nevada today, you can go and see that it headset.io. We also published some great industry reports that are, you know, a few pages. We kind of do deep dives and different segments. The most recent one we did was beverages report before that we did a Canada analysis and assortment analysis of who the players are, what the product mix looks like and so on. And so I'd encourage you to check that out. Those are free, um, and kind of give you a great insight into the type of data that we collect and how we can use it to help our customers drive decisions.
Matthew: Well, Cy, thanks so much for coming on the show and educating us and I wish you all the best the end of this year and into next year.
Cy: Sounds good, Matt. Thanks for having me again. Appreciate it.
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Dennis O’Malley is CEO of Caliva Dispensary in San Jose California. Listen in as Dennis shares how difficult but rewarding it is to run a thriving vertically integrated cannabis company.
– The price of wholesale cannabis in California vs Oregon
– How to successfully navigate regulatory changes
– Creating in-house technology
– Why delivery app Eaze is a dominating force in California Cannabis
– Building a brand
– Staying competitive
– What the future holds for cannabis operators in California
Matthew: How do you create a thriving cannabis brand in California given the immense amount of red tape and market competition? We're going to find out today in our interview with Dennis O'Malley, CEO of Caliva. Dennis, welcome to CannaInsider.
Dennis: Matt, thanks so much for having me. I'm excited.
Matthew: Give us a sense of geography. Where are you in the world today?
Dennis: Sure. I am right in the heart of Silicon Valley, so right in San Jose, California, which is just south of San Francisco in the middle of the state. What most people don't know about Silicon Valley before it was known for high tech and internet and before that Silicon semi-conductors, it was called the valley of the heart's delight and it was known for the best fruit and growing region of things like prunes and strawberries and other things, so.
Matthew: Almonds too, right?
Dennis: Almonds. Absolutely, we are right in the valley of the heart's delight.
Matthew: Yeah, that's Central Valley in California. I didn't know about it until I drove through it and I was like, oh my gosh, there's just tons of produce and things grown out there and you can actually see it from like satellite imagery, like how this huge valley, how big it is. It's pretty amazing.
Dennis: Absolutely. We've checked all around us. We're back to the farming roots
Matthew: And I'm in Paris, France today.
Matthew: Now, give us a sense of what Caliva is at a high level.
Dennis: Sure. So we are a large vertically-integrated cannabis company. We exist to make very high-quality innovative products for our consumers, and our consumers are mainly adult use consumers. And we seek to certainly be the most trusted brand in cannabis. And we really pride ourselves on a brand promise of consistency, transparency and accessibility of our products. Most people know us for our product portfolio and most people also have seen, experienced our dispensary in San Jose as well.
Matthew: Okay. Can you share a little bit about your background and journey and how you came to start Caliva?
Dennis: Sure. The easiest part about that is I definitely did not start Caliva. Caliva's a little over three years old. And I came on board a little over a year and a half ago. I always credit people from incubating and starting thing with...that it's the hardest thing in the world to give birth to anything. And those who did that I have immense respect for in any part of the industry, certainly as the founders of Caliva. I knew one of the investors in Caliva. I've had a 25-plus year relationship with them. And as I got to know more about the business, I was just intrigued with the mission that Caliva had and which was to do business the right way and have higher standards and provide a great way for, you know, newer consumers to get access to natural health and wellness options. And I really couldn't think of more of a mission-based purpose.
And so I came on board as president in early 2017 and took on the CEO role earlier this year and we're growing like mad and I wouldn't want to spend time with anybody else or you know, have any other mission. So we're thrilled about what we're doing.
Matthew: Okay. And how would you describe the California cannabis market right now for people that really don't have a sense?
Dennis: Yeah, I think there is an overabundance of press around our industry for a whole variety of different reasons. I believe that most people believe that everybody in cannabis is making money hand over fist and no one really is. You know, the adage that I've heard used in tech is it takes a long time to turn money into knowledge and that's exactly where the industry is at today. And hopefully soon we will be turning that knowledge into money.
So it is very much still in the investment mode for almost everybody within the industry. There are large billion dollar figures thrown out there, but then when you look at 35% taxes in the case of where we're at in San Jose to the expense of regulations and the cost of doing business, it is a very capital-intensive business that requires precision operations in somewhat large scale growth to be successful and we're certainly committed to it for the long term. But I also think that it's just extremely difficult to get long-term investment, longer term decisions based on uncertainty around regulations, you know, financial services challenges. So what most people don't see is the difficulty of how hard it is to run a business. But what I think we enjoy and we'd love to see is such as the new Gallup poll where a record amount of, you know, folks in the U.S. really are supportive for cannabis being illegal throughout the U.S.
Matthew: Yeah. And just so people get a sense of what the whole operation looks like, it's a vertically-integrated, grow dispensary, and then brands. Correct? Around your own brands inside your dispensary. Is that correct?
Dennis: Yeah. The easiest way to think about it is we create really great high-quality raw materials, so we have a 22,000 square foot canopy of grow. So we're producing thousands of pounds of high-quality indoor flower a year. We produce our own oil, so both crude and distillate oil that is mainly used in our own products, but also used in third-party products. So that's the first component of it in terms of grow and manufacturing. The second component of it is we produce a line of packaged flower, packaged pre-rolls, packaged vape pens. So we do a lot of our own in-house manufacturing, branding, packaging. And then lastly is we really control and manage our own distribution channels. So we have a large wholesale sales team.
Caliva brands are in about 350 dispensaries in California, and those are adult-use dispensaries. So we're in about 80% of dispensaries in California. We have our one retail store in San Jose as well, and we also enable both consumers to order online through caliva.menu and we have great relationships with other third-party distributors and online platforms such as Eaze. So that's the easiest way to think about our business. And we have other locations that we're opening up, we'll have a location in closer to San Francisco opening up next month. And then we'll have a location down in LA opening in February 1st.
Matthew: And what's the current cost per pound of cannabis in California at a wholesale basis roughly?
Dennis: Yeah. In terms of price per pound, if a wholesale buyer was looking to buy a pound or two from us, the average price per pound is anywhere between $2300 to $2,500. It goes up if there's a strain that's more exotic or higher THC or higher quality, and it drops if there's volume discounts. What we've seen at least for indoor flower is that there is still a shortage of consistent flower and consistent suppliers out there. So the price points have remained pretty stable since July 1st.
Matthew: Okay. And off the top of your head, do you know how that compares to your neighbor to the North Oregon and how much a wholesale pound of cannabis is going for there?
Dennis: Yeah. I don't have empirical evidence around this. Anecdotally, I've heard the same horror stories that most other people I've heard of a flower being sent to auctions and per pound price is wholesale going for hundreds of dollars. The worst anecdote I heard was that somebody had auctioned off their flower for $25 a pound, but that is unsubstantiated. Maybe urban legend, but I know that there has been certainly issues with wholesale flower, mainly outdoor and greenhouse I believe in Oregon. Certainly, a different market right now.
Matthew: Wow, that's crazy. If you think about us having a...if we had a national... It was prohibition ended nationally, how there will be a free flow and it would come to some equilibrium, you know, supplementing California supply. I guess since California likes to control everything, they'll probably not allow that, I would imagine. But that's a tremendous difference. That's almost, you know, what are we talking about here? That's 10 times more. Well, I mean, excluding that $25 like outlier, you know, more than 10 times in California. What do you attribute that to?
Dennis: Well, I think Oregon, from what my understanding is had an unlimited cultivation licensing structure, so the oversupply of flower, I believe, was a just unforecasted or poorly forecasted in terms of the regulatory bodies, one. Number two is given that the infrastructure it takes to, you know, to build for flower and then to be able to produce flower once you're actually invested in and it's very hard to deviate from it. So if you have a cultivation facility, you cultivate flower, it's very difficult to pivot. So I think California had learned from that and certainly try to limit some of the license is one. I think two, some of the operators still understood that in the market that that might be a tougher area. However, our forecast at least at Caliva is that there's 10 times more legal supply that will come online in 2018, then there is legal demand. So we certainly see cultivation as an area that will have excess capacity very quickly. The amount of infrastructure and large-scale projects throughout the state is just massive and we actually see majority of consumers turning to other products outside of flower.
Matthew: Interesting. So if that's the case, then to stay alive and prosper, you have to lower your production costs. And also, to maintain your margins you really need loyal customers that see a unique value in your product. How do you respond to those two dynamics?
Dennis: Yeah, great question. For us, it's always been about vertical integration and vertical integration for us meant controlling the supply and demand chain. And really the number one driver for us was to ensure quality. So we're obsessed about the quality and the customer experience. So our primary objective is how do we get the very best tested consistent product into the hands of the consumer in a very easy manner? And vertical integration for us means that we can deliver the freshest product at the lowest cost with the highest quality and the most convenient way to as many consumers as possible. Now, does that also provide some opportunity for cost optimization and driving down costs and increasing efficiency? Absolutely. And we have a ton, we have a ways to go to be doing that, but our guiding principle has always been quality first customer first and we really built Caliva around that and have tried to deliver against that promise.
So have been customer-obsessed and we still believe that if we're producing very good raw materials that go into innovative products and we have a great experience in terms of how they buy their products and whatever way that they wanna buy, whether it's through our dispensary, somebody else's dispensary, on eaze.com, on caliva.menu, they choose in terms of how to purchase the products and that it's a very convenient way for them to be able to do that. You know, that will equal happy customers. But of course, they wanna pay less versus more and will continue to try to drive, you know, cost optimizations around that.
Matthew: Give us a little background on what changed on July first and why that's important for the California market.
Dennis: Yeah. Great, great question. I was blindsided by the demand that we received 8:00 a.m. on July 1st, and I remember this just vividly. It was one of the, you know, the biggest aha moments for us. I was sitting at my computer and we had an email come in from Humboldt that said, we would like to see if you delivered a Humboldt because we are short on flower. And I immediately knew something was different. So I never thought that a dispensary in Humboldt would reach out to an indoor grower in San Jose, and that they would be short of flowers. So 8:00 a.m. on from July2 first our world changed in what we saw was that there was a complete shortage of providers that were able to provide tested product in childproof packaging through a distributor in economical and timely manner.
And so we were able to do that and there's different infrastructure type of things that we built in advance so that we could be consistent and reliable to our dispensary partners, but we complete all. I completely underestimated the amount of demand that would come into our facility for all of our products, including flower. And what that resulted in was a certainly backlog of orders that we just dug out of a couple of weeks ago. So we had been on back order for every product we've had for July through, you know, early October.
Matthew: Wow, that's crazy. And you know, speaking of Humboldt, there's a lot of black market trade and that has an effect obviously on the regulated market. How do you view that? Do you think that's a big impact, small impact, and how do you feel about in general?
Dennis: Well, I think there's two ways to answer that. One is just my personal feelings on this. My personal feelings are that we as an industry should do whatever we can to allow as many people into the legal industry as we can. So I don't believe there's been enough help, guidance, flexibility to be able to convert, especially farmers, but also manufacturers and distributors from a quasi legal market into a illegal market. So I wish as an industry we did more on that.
The second part about that is indoor flower, that there's not a large black market for indoor flower. So the most competitive market out there for black market flowers is greenhouse and outdoor. So for discerning consumers who are looking for top quality flower we haven't seen that it's been a large issue. Would we like the black market to go away? I think every industry would always say that and we and certainly we would. But we probably have less exposure at it at Caliva given that majority of our revenue is coming from indoor flower and then packaged products than outdoor flower and greenhouse flower.
Matthew: Okay. One thing I've noticed about Caliva and talking with you, maybe it's where you're situated in the world in Silicon Valley, is that you've put a lot into developing your own technology, a lot of effort and time o optimize your business. Can you talk a little bit about why you decided to invest in your own technology versus buying off the shelf and what that experience has been like?
Dennis: Sure. Well, I think a good example of that is our wholesale portal. We're in a very unique position as a wholesaler to, you know, again, you know, hundreds of dispensaries in the state is that we run a dispensary too. And we know how hard it is to maintain accurate inventory of product on our shelves. And we were certainly affected by it as a dispensary on July 1st when we didn't have edibles on our shelves for two weeks. And we didn't have really visibility in terms of when those edibles would be back up on the shelves. So we built a wholesale portal because we didn't see that there was an existing application that was out there that met our needs, that was, you know, very unique to Caliva not a marketplace. And so are, you know, hundreds of dispensary customers are able to see real-time inventory of all of our flower, not just what is on in inventory today, but also what's being harvested as well as the inventory of our products. So they can place orders online for immediate delivery. They can place orders ahead of time.
So what we've heard from our dispensary partners is it allows them to have a really good, you know, forecasting of products because we are reliable, dependable partner that we have products in stock and inventory. And then when they actually order them, we deliver them on time in a seamless process where they're getting updates and those types of things. So we've spent a lot of time and a lot of investment to develop the wholesale portal, but hopefully, it's paying off for our dispensary customers.
Matthew: And then for your menu, I mean there's a menu that's required, not required, but there's a menu that most dispensaries keep for their...just for themselves, their dispensary, for their customers, but they also want to cascade to Weedmaps or other platforms so that they can get as many potential eyeballs looking at their goods. How have you done the menu? How does that work?
Dennis: Yeah, really great, great question. So just as much as we have developed innovative technology for our wholesale business, we've developed the same type of innovative technology for our consumer business. So caliva.menu, which is, you know, our online ordering platform today has all been built in house and it's really kind of modeled after Google Express, which is a very kind of easy mobile application to be able to order products quickly. But what we saw was when I came into Caliva, Caliva and most other dispensaries, they spent a lot of time manually updating all of their menus and their specials and online and then going to third parties like Weedmaps and other places and uploading pictures and product descriptions and prices. And nobody else in any other retail industry does that.
What everybody else in retail does is they invest in a product information management system. They have one system of record for all of their products. That system of record for all their products syndicates that information to all of the end points of which, whether it's a wholesale marketplace or your consumer site and you make one change and you have the visibility to those changes and everything else is up-to-date. It's the only way to manage channel conflict and updated pricing and inventory. So we early on invested in product information management systems, brought in people who could manage APIs, Application Program Interfaces, to make sure that we could talk to other third parties.
And then we have, you know, had a pretty discerning process in terms of what third-party technologies that we work with and they all have to have open or rest APIs, so that our technology can connect into it. But it's made a world of difference for us to have great consumer experience because whatever our consumer see online, they know that we have it in stock. It's the actual accurate pricing. So we no longer have customers either ordering online and saying, whoops, we're out of the product or coming in and say, whoops, you know, the menu wasn't updated. That doesn't exist at Caliva. And that took a long time to get to, but that's why we made the investment in the technology.
Matthew: Okay. And for people that don't know API is Application Programming Interface and that essentially is a way for systems to talk to each other in a way that's universally understood by all and pass information back and forth. So did you try anything off the shelf and were unhappy with the experience there? Is there anything you can say about that?
Dennis: Yes. We've tried and kicked the tires with many different applications. Unfortunately, the amount of investment I would say going into a technology is created for complex vertically integrated cannabis companies just as light. Most technology applications are optimized for dispensaries which aren't vertically-integrated because it's a larger market share and there's just not a lot of people developing applications for large vertically-integrated businesses. So we've kicked the tires on a lot of them and we continue to build our own tech platforms. But we've, you know, we failed at a bunch of different tech platforms and applications too. So the caliva.menu and the wholesale portal are shiny stars, but we feel we've got our share of failed attempts of other things as well.
Matthew: And what about creating an ideal dispensary experience? I mean, there's some objective things you can look at like square footage, but then there's kind of soft subjective things like lighting, the general vibe and the mood and how a dispensary welcomes you. What can you say about creating a dispensary experience?
Dennis: Yeah, our dispensary experience has the same guiding principles as we do for how we think about our company and our role to consumers. So as we position ourselves, as you know, aspirationally, to be the most trusted brand in cannabis, trust is critical. Trust comes from consumer confidence. So consumer confidence really comes from education. And we know this is a highly considered purchase for most consumers, that they're gonna shop online a couple times. They're gonna ask a couple of friends, they're gonna do their research. And in this day and age for the new curious consumer, they spend about 12 to 15 minutes with our wellness consultants. We used to call them budtenders, we now call them wellness consultants, asking questions about what's right for them. So for us the, you know, the guiding principle is how do we have our consumers trust the experience within Caliva and then trust the product and the brands that they buy.
So we certainly believe that those coming into the store, spending that 12 to 15 minutes with our wellness consultants, they wanna be able to have credible people provide expertise around what their issues are and how to solve them. We have 30,000 consumers come in, you know, to our stores in a year and they're generally asking for help with pain, sleep and anxiety. And so our wellness consultants should be able to ask questions, listen and provide some recommendations on that. After they come into the store, their next order is usually a delivery or pickup order given they have found something that's worked for them, we need to have a very seamless, easy experience to be able to order any products and Caliva products on our online menu. And it has to be, you know, somewhat fun and we think we've been able to deliver that.
Matthew: Okay. When you look at the budtenders you've worked with or wellness consultants, are there any things that stand out and what makes a good a wellness consultant? Is it empathy or energy or knowledge? What are kind of the few things that stick out?
Dennis: Yeah, it's 100% confidence and knowledge. So we are obsessed with polling our consumers and getting feedback on our consumers. We have a online chat on our website and our web app that we have real-time chats from our wellness consultants and we get real-time reviews from them. But the overwhelming feedback on our wellness consultants is how knowledgeable that they are on the products, how helpful they are in terms of the products and their success in terms of recommendations.
So there's a lot of different types of personalities. There's a lot of different styles. There's some people who spend way more time than they probably should with customers. There's some people who just get to the point. There's some people who are curious and happy. There's some people who are more introverted. But in the end, we look for people who are very naturally curious, who are empathetic, but most of all, have accurate and factual knowledge for consumers and ensure that that consumer is getting, walking away with, you know, confidence and trust in the process. But it's been amazing to us to see the consumer feedback after we survey them both on our online chats and then our either retail store experience.
Matthew: Now let's talk about delivery apps a little bit. I can see why these are so popular, especially in California. People come home after a long day or they're up late at night and they got their shoes off and they're chilling, they don't wanna go out and deal with California traffic. So they pop open their smartphone and they make an order online. Which apps are they turning to the most right now? What has the largest market share in California?
Dennis: Yeah, just, even before that, you know, if you look at the economy, it's a convenience-based economy, especially with people who are 21 to 30 and Millennials. If you look at Netflix and GrubHub and Domino's and Amazon Prime, everybody is seeking delivery. So when they look at cannabis, it's no different if you know what you're doing. So I would say for us, what we see in certainly in Northern California, there's really no competition in terms of market share to Eaze. Eaze is the default, I would say, you know, platform for most of the Northern California consumers. There's a lot of other great players that provide, I'd say, connoisseur type of deliveries and have built a good niche in terms of, you know, especially around San Francisco and those types of places. But for large market share, it's definitely been Eaze and we see Eaze also making big strides down in Southern California.
There's an app called Stony App that is getting great traction down in Southern California too. And those apps are generally for people who really know what they're doing and who, you know, really know what they want and they want their cannabis pretty quickly and they wanted a great value. What we found at Caliva is our consumers are a little bit different than that on a majority of time. So our consumers, when they use caliva.menu to order, they're okay waiting a couple hours. They actually have a bunch of questions when they ask.
And so, you know, we have about a thousand online chats a month when we're doing delivery orders because people are asking questions, you know, in real time to our wellness consultants on the app before they order. And it's just a very different consumer. And we, you know, we find certainly within the Bay Area, so south of San Francisco through just south of San Jose that our own delivery service is probably increasing about 20%, 25% month over month. But I would say those are the three. Eaze, we've certainly seen some increase in ours. And then Eaze and Stony App and in Southern California, and we're a great partner with Eaze. Our products are on their menu and we support them in a number of different ways. But they're a fantastic service.
Matthew: Now, when people use an app to have a delivery made to their house, can you talk about the difference between the current revenue in store versus on an app?
Dennis: Yeah, I certainly can give a perspective on it. Again, you can't find better deals in cannabis than you can on Eaze. So they have incredible promotions and we, you know, we see incredible delivery times from that. So in general, you would generally see, I would say, you know, lower AOS from that type of delivery platform. In terms of, you know, in-store purchases at least in our experience, our in-store purchases from new consumers that they're putting their toes in the water. So their initial purchase isn't that high. What we do see is that, you know, after that, at least from in-store to our delivery is once they found something that works for them, they feel much more comfortable and confident and they're ordering, you know, multiple of those items in two weeks later or three weeks later. So I think it's just a little bit different. It's, again, Eaze has a very, I'd say, a regular consumer that takes advantage of great deals and, you know, at least for Caliva at a much smaller scale than Eaze obviously. We see our consumer trying first deciding what works for them and then really getting on a good routine of products that they would use over and over again.
Matthew: Okay. Now, if you were to wave a magic wand and change one thing about the California market, what would it be?
Dennis: Gosh, I don't know if my answer would be different than anybody else's in the industry. But, you know, we try to look at what's best for the consumer versus what's best for Caliva. So if I'm a consumer, here's what I want. Number one, I wanna be able to pay for my candidates with a credit card. So where and how can I can do that? And it's not always easy to do. For instance, you can do that with eaze.com today. You can't do that on, you know, caliva.menu today. So if I'm a consumer, I want to pay on credit card. Number two, if I'm a consumer, I want to be able to talk to experts around cannabis and I don't wanna have to drive to, you know, an industrial area to do so. So I'd like more dispensaries. I like dispensaries, you know, zone in areas that are accessible to me.
So in, at least in our area, there's not one dispensary from San Francisco to San Jose, which is a highly populated area, but that's, you know, that's an hour from, you know, having a dispensary. So in more rural areas, it's even worse. So the number two thing as a consumer, I'd like to have more dispensaries. And then number three, I'd say, I'd like to have a better assurance of, you know, tested and quality products. And if I'm a consumer, I'd wanna know if my CBD is... Is industrial hemp CBD from China or if it's, you know, cannabis-based CBD from Caliva. I'd like more visibility and transparency of what's going into the products and I like more of official rubber stamp of, you know, saying that this product was tested under these results and to have more consistent testing. So we always try to look at what the consumer wants and if I had a one or maybe that's three wishes versus one, those are the three things that I'd look for.
Matthew: Is the market changing at all in a way that you think most business owners don't really understand, you know, there's a change that's happening that you maybe see that you think they don't appreciate quite in the same context at all?
Dennis: Yeah. Yes and no. One is I think there is no harder business in the world than to run a cannabis business. And most business owners that I know are working 7 days a week, 20 hours a day, and they are passionate about their employees and their consumers. It's just it's an amazing mission for most of these folks. So I think, one, they have their nose to the grindstone so they see every single day what's happening. But I think if you look up and, you know, pick your head up out of the trees and see the forest, there is this groundswell of a consumers who are demanding natural health and wellness options and the situation today is just not working for them. They're not looking for high THC products that they have to go in and buy from a dispensary and pay up to 35% taxes on. They want to integrate cannabis into their daily lives. They would like to, you know, micro dose as needed, have a lot of confidence in the products and they'd like to be able to receive it in a very convenient manner.
So it's difficult for, I'd say, many smaller business owners to go after where the market is going versus where it's at today. But the challenge with that is that when the market gets there, where will you be? And we certainly work and try to help our partners be able to get there and to see what we're seeing, but that's where we're headed. We're headed to not the 500,000 people that are shopping in dispensaries in California today, but we're going after the, you know, the 24 million consumers in California voted for cannabis legalization to be able to try to integrate, you know, cannabis into their lives and give them a very easy, convenient way to be able to choose cannabis to whether it's alleviate pain, sleep and anxiety or whether it's, you know, good for you products around energy and recovery or whether it's just recreational products to be social.
Matthew: Okay. Dennis, I like to ask some personal development questions to help listeners get a better sense of who you are personally. Is there a book that's had a big impact on your life or way of thinking that you'd like to share?
Dennis: Yeah, it's certainly nerdy, but it's been helpful, and I've listened. I've read the book and both listened to the podcast, but it's what...it's called "What Matters" by John Doerr. And it's really about a management methodology that is aligning your business to objective and key results. And they're called OKRs and they're pretty popular now and Google has made them popular. But what I found is, is that it just translates over into life, which is what I used to call the big rocks, which is, you know, what are the big things that you have to get done and what do you need to get right. And it was really a good framework for me that we've started to implement at Caliva. So we all get visibility in terms of what we're working on, but most importantly, what's most important to us. And I thought that, you know, for me, that translated really well to life as well and it's a good system of thinking for me. So that's been my latest book and it's on audible.com and it's a fun read too.
Matthew: Oh, great. For people who don't know John Doerr's one of the founders or principles of Kleiner Perkins, a big venture capital firm right there in your neck of the woods there.
Dennis: Absolutely. Yeah, he does a good job.
Matthew: Okay. And is there a tool that helps you or your team with productivity at all that you'd suggest?
Dennis: Yeah. And my team would get tired of hearing about this from me. And they would all be rolling my eyes, but I am a Slack addict. So Slack is an internal messaging tool and I have a wonderful team of young engineers that humors me and in all of my asks to be able to get real-time information. So Slack is it's an APP on my phone that I get real-time notifications in terms of what our hourly sales are in a retail dispensary. I get out of stock alerts if we're out of stock and any products. It's a check-in basis, so I know where all of the team is at all times for location and I get, you know, real-time status updates on it. So the integrations that we've had into Slack and the notifications that I get, I geek out on that. And that has at least allowed me anywhere I'm at to really have a good pulse of what's going on in the organization.
Matthew: Okay. So you have different channels that allow you to have team members that are involved in certain details of the business communicate together. So you might have like cultivation on one, your wellness consultants on another and that way you're not bothering people unnecessarily with communications that don't need to be involved.
Dennis: Exactly. It's all about access to real-time information. So the less that I have to actually bother people and randomize them and ask them what's going on and the more that they're able to proactively signal to me about what the updates are as well as just real-time integration with other apps. It's just been a great productivity tool for people to broadcast out what their updates are. So I'm on slack. That's the app that I'm on a more than email and it's, you know, for a company that is now 330 people with multiple locations. It's an app I certainly couldn't live without.
Matthew: And would you say it's reduced your email usage and if so by how much?
Dennis: It absolutely has by 50%. I hate email. I'm terrible at email. It takes too long. It is not a critical form of communication. And you know, bite size, bite size, little updates through Slack have dramatically changed the interactions that we've had. But yes, if I could reduce my email usage by another 90%, I would.
Matthew: I don't know if you've read the study, but there, it was said that for every one email you send you get 1.25 emails back.
Dennis: Self-fulfilling prophecy for sure.
Matthew: So there's definitely an incentive there to find ways to reduce email. So, well said. Dennis, in closing, how can listeners learn more about Caliva? Find your brands, find your menus and visit your dispensary?
Dennis: Yeah, I really appreciate it. One is that if you're in the San Jose or Silicon Valley area, please come by our dispensary, it's right in 7th Street in San Jose, we love to walk you through what we're doing here. We have delivery through caliva.menu in the greater Bay area. But again, we partner with Eaze, so if you're anywhere in any part of California, just eaze.com where we have 14 to 17 products on there. And then on our website of just go caliva.com, you'll see, you know, over 150 dispensaries that we have listed in terms of where you can buy our products and through all of our great retail dispensary customers. So we are very unique to California. We're, you know, very much a California authentic brand with California roots and, you know, we look forward to continuing to expand throughout California.
Matthew: Well, Dennis, thanks so much for coming on the show today and we wish you all the best.
Dennis: Yeah. Thanks so much, Matt. I really enjoyed it.
Andy Joseph is CEO of Apeks Supercritical. Andy and his team make advanced extraction machines. Listen in as he talks about how the industry is evolving and how businesses appetite for specific methods is evolving.
– Andy’s background on Navy submarines
– Creating extraction machines while moonlighting
– Business owners are more interested in terpene preservation
– CO2, Ethanol, Butane, Propane, which extraction method is better?
– Why your finished product should drive your extraction methodology
– Monitoring and controlling extractions in real-time
– Fractionating, what is it and what does it matter?
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It was only a short time ago that cannabis oil extraction was an esoteric practice that people had little interest in. As the market for edibles, vape pens and infused products grow, cannabis oil as an ingredient has really taken off. Here to tell us more about it is Andy Joseph, founder and CEO of Apeks Supercritical. Andy, welcome back to "CannaInsider."
Andy: Thanks, Matt. I appreciate you having me on the show and looking forward to our second conversation.
Matthew: Yeah. Well, give us a little refresher. Where are you located again?
Andy: We are in Columbus, Ohio.
Matthew: Okay. And I'm in Paris today. Now, Andy, Columbus is becoming a hipster paradise. And for people that are in California or in Brooklyn, they'll say, ''Surely you jest, Matthew Kind. Nothing happens in Ohio," but people are moving from other cool places to go there. What is going on there and are you responsible for it?
Andy: Yeah, I am definitely not responsible for it, certainly not for the hipster influx into Columbus. But, you know, the Midwest in general has a lot of favorable things. But I have to put a disclaimer out first. The most unfavorable thing that nobody has control of, that no one has changed is the weather. So while it's not Columb-, it's not California, it's not the beaches that you're gonna find, the East Coast, it's Midwest and, you know, summers are kind of nice. They get a little hot, winters are terrible and, you know, the gray skies for two or three months kind of make it unbearable. Nonetheless, the lower cost of living, the jobs [inaudible 00:02:03] manufacturing, you know, [inaudible 00:02:06] renaissance that you can almost call it, you know, the rebirth of manufacturing jobs is Midwest. But you just don't find that kind of resurgence of jobs and economic boost in some of the other places where cost of living is just so ridiculously high that, you know, regular guys can't get a job.
Matthew: Yeah, and, you know, as I have gone around Ohio and especially Cleveland and spent time there, bicycled around the different emerging neighborhoods there, and one thing I notice is that all the infrastructure's already built for a manufacturing renaissance there, it just has to be, flip the switch and there's people there that know how to use it, too, which is, you know, other places, it's not the case. It's like this can just be turned on if we can make this happen. It sounds like it is happening there, but why are...?
Andy: It is.
Matthew: But, you know, I grew up in the Midwest, in Chicago and you cannot underestimate the soul-crushing nature of about a hundred days of granite gray skies and no sunshine. It's absolutely, I say "soul-crushing" because it is, it's just, you feel like you might be in purgatory and then the sun comes out and it's like, you're in the Emerald City from "The Wizard of Oz" or something. It's like everybody, like, rips their clothes off and runs down to the nearest body of water. Like, "What? What is this light that's coming between the clouds?"
Andy: Some folks will take the positive aspect on that light deprivation anxiety problem and say when the light does come out, you know, it makes you appreciate it that much more. The Midwest does have some beautiful seasons and we got all four seasons coming through and, you know, the price to pay of having all four seasons is that, you know, there's about a hundred days of gray. It's rough.
Matthew: Yeah. Well, I could reminisce about the Midwest all day, but I will say here in Paris, I've actually had a couple people ask me like, ''Hey, I've heard Detroit's cool now, is that true?'' And I was like, "Wow, I don't know where you guys get this information from," I guess it is rebuilding, but I think it's funny that more than one person has said that to me. And how does this information trickle over here?
Andy: Well, and it's downtown. You know, what they don't realize is that as soon as you get about maybe a mile away from the downtown of Detroit, it's still the same crappy Detroit it's always been, but the actual downtown area itself has really been revitalized. It's pretty impressive up there.
Matthew: Yeah. I know that the billionaire guy from Quicken Loans and is it the Cleveland Cavs? He's really taken it upon himself to turn that city around and I think it's fantastic. But let's jump into extraction here. What are we doing? We're just joking around, so. Okay, let's jump into extraction. And I like to welcome everybody into the conversation, not just people that are already familiar with it. So tell us what "supercritical" means and what "extraction" means so we can understand it.
Andy: Well, supercritical, and I suppose to be clear, it should be supercritical fluid that we're talking about. And, you know, basically supercritical is a phase. It's a matter of state. So everybody knows there's a solid, there's a liquid, there's a gas. Supercritical is sometimes called a fourth state of matter. [inaudible 00:05:23] just a combination of liquid and gas properties, so it acts like liquid. When we talk about extraction, it acts like a liquid and can dissolve oils from the plant material and has solvency capabilities. But it acts like a gas at the same time from the standpoint that it's gonna expand to fill the container that it's contained within. It's not affected by gravity. It also gives it a very, very low, what's called surface tension. Surface tension, if you think about it, it's like the meniscus in a glass of water. It's the force...
Matthew: It's what the water bugs float on when you see them on top of the water.
Andy: Yeah. Exactly, exactly. That surface tension, right, is the force and, you know, it's very, very hard to break that surface tension. If you can imagine, you know, a droplet of water trying to get into a very, very small groove, say, for instance, a piece of plant material, you know, it's gonna have a hard time getting in there because of that surface tension. Supercritical fluids have extremely low surface tension. And so they can get way, way deeper into these little nooks and crannies that are in the plant material that allow it access to essentially act like a solvent, dissolve out those oils. So supercritical fluid is really kind of this unique combination of gas and liquid properties that happens not only with CO2, with lots of other things. But because it can happen at such a lower pressure and lower temperature for CO2 compared to, say, like nitrogen and oxygen and other kinds of gases, you know, it's typically the gas of choice for supercritical fluid extractions.
Matthew: Okay. And give us a little about your background. You were on two years ago, and I think even people that heard that episode probably don't remember exactly your background. How did you get into this field and come to start this business?
Andy: Sure. I started, I guess to start, my career started in the Navy. I spent six years on nuclear submarines stationed out of Pearl Harbor. I was an enlisted nuclear mechanic so I essentially ran all the mechanical portions of the power plant and the propulsion systems on the submarine. And spent six years doing that, got out of the military. And went to college at Ohio State. And needed to make a few extra bucks, right. The GI Bill pays for some of your college but doesn't pay for all of it. So I started a fabrication business. I was in the welding engineering program and met a customer who needed some botanical oil extraction equipment manufactured. So I really came at the extraction industry or the botanical oil industry from a manufacturing approach. Not so much from I was already extracting these other things and decided to build the equipment because I couldn't find one. That was on me, right?
There was definitely a hole that needed to be filled. I approached it from a manufacturing standpoint. So that was all the way back in 2001. And from 2001 until 2012, Apeks was a part-time job for me. I did it on the side at the same time that I was a director of a engineering group for a consulting firm. And 2012 came legalization of both Colorado and Washington. And, you know, just the kind of the massive growth of the cannabis industry, they all came together and I was so busy at that point in time. I essentially had two full-time jobs at Apeks and I had this, you know, my real ''job.'' So I made the leap. 2012, I decided, you know what, I'm gonna focus on Apeks full-time and here we are, six years later. And just about a year ago we shipped our 500th CO2 extraction system.
Matthew: Wow. And were you on the submarines then when they would go out at sea or when they came back, you'd work on them?
Andy: No. I was stationed aboard the submarine. So I would go out and go under the water and, you know, maintain essentially all the mechanical propulsion and kind of the life support systems, the water and different elements like that.
Matthew: Do they give you some sort of screening to see if you have a good fit for this type of, like, understanding? Because I think of this stuff and it just sounds like all Greek to me in terms of nuclear propulsion and all the stuff that you are comfortable with.
Andy: Yeah. There's definitely initial screening, you know, way, way back in high school, they give you a test called the ASVAB. I have no idea what it stands for, but that basically is a preliminary screening to show that you have the intelligence to get into some of the more challenging programs within the military, not just the Navy. But then, you know, going on submarines, there's some additional psychological screening that says, you know, "Are you gonna go nuts when you're in this steel tube underneath the water?"
Matthew: Yeah. Does any crazy stuff go on down there after you're underwater for that long? I mean, I guess being in the Midwest with the gray skies for 100 days of gray gets you used to it a little bit more than people from California or Florida or something.
Andy: Yeah. A little known tactic that the military, at least the submarine service anyway, generally tends to take when you're out under what's called underway for a long period of time. My longest was 56 days. They typically run the oxygen at about 18% or 19% as opposed to 21%. And you're running the oxygen lower, basically it keeps everybody kind of, you know, a little more even-keeled and a little less active.
Matthew: Okay. That's kind of how they like put saltpeter, I think, in the water in prisons to keep everybody kind of chilled out.
Andy: Exactly, the same concept.
Matthew: Okay. Okay. Now, why did you choose CO2 as the means to extract oil from plants instead of a different medium like ethanol or butane?
Andy: I suppose it's worth pointing out at first that we manufacture equipment. So, you know, we don't do the actual extractions themselves, at least not yet. Now we were fortunate enough to win a processing license here in Ohio to start with the medical marijuana market. And so our processing entity, which is called Ohio Grown Therapies, will obviously utilize Apeks Supercritical equipment. But, you know, it's important to note that I don't believe that any one of the three main extraction methods that are commonly being used in cannabis, CO2, ethanol, and hydrocarbons of butane and propane, I don't think any one of them is better than the other. There's pros and cons, right? And I would argue that most of them are complementary, but all of them are ultimately driven by not the extraction technology, but rather what you want at the end, right? What's your final product?
As an example, hydrocarbons, butane and propane, they're fantastically efficient at making water or more commonly, more and more popular dabbing products, recreational type of dabbing products. Very, very efficient extraction method and just not very much post processing to be able to create those popular types of products. CO2 and ethanol can make them, but it can't do it as well, ethanol, certainly. On the flip side, CO2 does a fantastic job of extracting not only the bulk extraction of the cannabinoids that are there, but also doing a terpene extraction. And so, the ability to what's called fractionate, or start to separate some of the elements that are found in the plant material get the terpene separate from the cannabinoids, for instance. That gives the ability to do things like come back in and reconstitute a vape pen cartridge. In other words, you do an extraction. You get those terpenes, you set them off to the side.
Then you finish your cannabinoid extraction, you do a process like winterization, you do a distillation, and you can take those terpenes and put them back in to create a distilled cartridge that's got the full flavor of the terpenes that came from the original plant, right? CO2 affords those kind of possibilities.
Matthew: Do you find that more people are asking you about terpenes now than they were a couple years ago?
Andy: Then they were six months ago, let alone a couple of years. But you know, ethanol, and I'll address the terpene thing here in a second. Ethanol, you know, has its pros and cons as well. The biggest problem, the biggest pro about ethanol is, it's fast. I mean, it does a really great job and it's widely utilized in other industries like flavorings and essential oils. The problem with it is it's not selective at all, right? And so you have to either get really cold to prevent it from grabbing all the chlorophyll out of the plant material. And no matter what you do, you're never gonna get terpenes from it because of the fact that you have to expose it to so much heat in order to separate that ethanol and alcohol.
That being said, ethanol is a fantastic feeder. If your end product is just straight distillate, sorry, straight distillate, essentially, you know, high, high purity THC or CBD products. That's a good feedstock for edible products, for instance. So ultimately the choice between propane, butane, CO2 and ethanol really isn't about the technology. It's more about what you're trying to make at the end. And most of our customers have both, right? They're complementary. Some of them will even have all three of these different technologies. CO2 does a great job with extracting terpenes, but ethanol can be faster at extracting cannabinoids. We'll find most of our customers actually use both. And for our processing facility here in Ohio, that's what we intend to do as well.
Matthew: Interesting. So that's a great way of framing it is that, you know, "Tell me what your end product is and I'll describe to you what might be the best extraction solution."
Andy: Exactly. That's exactly right. And anybody who says, "CO2 is the best for everything," or, "Butane is the best for everything," I would run away from that because that is, it's just not true. It's not reality, it's not how it works. There's pros and cons for everything.
Matthew: Now you talked a little bit about how people are asking more about terpenes, but how have the customers that approach you, since we last talked two years ago, how has it changed? Are they more sophisticated? Are they looking at things more holistically, have they different preferences?
Andy: Well, I think that the market's changed. You know, there was this race to the maximum amount of THC that we could possibly get not too terribly long ago and, you know, how much more pure, how much more closer to 99% can we get. And I think, you know, it sounds kind of cool, but people missed the rest of the puzzle, right? Just having THC, 99% THC means that there's nothing else left. And so all of the other elements, whether you're looking for an entourage effect, whether you're just looking for flavor in a vaporizing pen, it doesn't really matter. People started to say, ''Hey, you know what? This 99% thing's not so cool. Number one, I just get so stoned, I can't do anything and it's not even fun. And number two, it doesn't taste good. It's not an enjoyable experience overall.'' And so the term "full spectrum extract" has really started to take hold in the last year, which is a combination of extracted oils and terpenes and cannabinoids from the plant material that most... How do I say this? That are very similar to or most closely replicate what was originally in the plant material to start with.
Matthew: Okay. Okay. And what type of businesses are your prospects, would you say in the last six months, the majority creating? Are they dispensaries that are vertically integrated? Are they processors selling only to other businesses? What are you seeing the most of?
Andy: Well, it really depends on what state you're in. You know, unfortunately you can't just kind of generalize the entire industry because of the licensing structures that have come across in different states. If you force me to generalize it, I'd say, you know, the West Coast and/or recreational states, you know, those are, our customers tend to be what we refer to as processors. Fewer and fewer of them are becoming vertically integrated. I would actually say that they're moving away from being vertically integrated. But the processors are a combination of either wholesalers, where they'll take oil and sell that as crude or even do some secondary or tertiary refinement and sell that as a wholesaler to other companies like edible manufacturers, for instance. And so you're starting to see kind of this segmentation of the industry start to come forward where, you know, not everybody's doing every single piece of the vertical integration, but rather just their own little piece and getting really, really good at it, getting really, really efficient at it.
Now contrast that with other states, and Ohio is a great example. Pennsylvania and New York, right? Some of these other newly medical states with new industries that are extremely, highly regulated and have licensing structures that preclude "business as usual," right? Those ones are a little bit more difficult to predict because the license structure really drives the economy of things, not so much just, you know, free market. And so those ones are a little bit stranger and you can't necessarily say that they're doing it because it makes sense. They're more doing that because that's the way the license structure was put together.
Mathew: Okay. So it sounds like there's more specialization happening. The field is subdividing and people are specializing. The specializations you're seeing is there's more interest in fractionation in terms of... It's fracturing, right? I'm saying that correctly. I feel like I always say that wrong.
Andy: No, it's fractionation.
Andy: Yep, fractionation, or fractioning.
Matthew: This is happening to preserve terpenes or to get a different desired outcome for a specific product.
Andy: Yeah, absolutely. And that's one of the pros of CO2 is its ability to fraction the initial bulk or crude extract. Whereas ethanol, butane may not necessarily have that ability to fractionate, or be selective is probably a better way to say it. CO2 is tuneable and you can make it selective as a solvent and say, "Okay, I'm gonna run parameters that aren't going to get all the fats and waxes out. I'm gonna get just the lighter oils and the terpenes." And then you can change the parameters that you're operating at to make it a more powerful solvent and pull out more from the plant material, right? So you can start to get these initial fractions. What you can't do, and this is kind of a misunderstanding why a lot of people wanna talk about fractionation, what you can't do is just say, "Okay, I wanna select just the THC," or, "I wanna select," even more popularly, "I want to select just the CBD." It doesn't work that way. You can select kind of ranges of molecular weights, but you certainly can't select individual compounds, at least not in this initial bulk extraction stage.
Matthew: Okay. Now you'll notice at the commodity exchanges, you know, a pork belly or a bushel of corn or wheat, all of these commodities are kind of defined exactly what they are, so then traders and farmers and speculators can all kind of can trade on something they understand what it is. Do you think we're moving into any kind of standard buckets in terms of what oil is? So it can be, so you don't have to go into some huge spec sheet on what the oil is that you want created? You could say, "I want this grade," and it's understood what that means.
Andy: I think that the industry is in the very early stages or the infancy of something like that. I don't know that, certainly not the medical marijuana industry and maybe even the recreational marijuana industry. I don't know that you'll ever have volumes that are big enough like corn to justify, you know, kind of trading like that. But you're certainly gonna have qualities and/or standards of quality for different refinement levels of the extracted oils, right? Now, an area where you might go to look to here in 5 or 10 years that might be closer would be more hemp CBD. So to get out of the marijuana side, start talking about hemp and CBD, you know, they're growing that in fields. They're using agricultural equipment to do that kind of stuff. I think if there was something that was gonna happen in the ''marijuana industry,'' it would probably be more hemp CBD-related.
Matthew: Okay. Yeah, I agree with you. Hemp is much more agricultural. It's just gonna be a vast farmland dedicated to it. That'll be probably more fitting. Okay. And now when a customer or prospect comes to you and says, "Hey, how do I define the return on investment or ROI?" or, "How can I put my business person hat on and look at this?" What do you tell them?
Andy: Well, we've got return on investment schedule...we actually started putting out return on investment schedules for our equipment...geez, I wanna say that's four or five years ago because that was a lot of the questions that we're getting. And today, we still publish all return on investment propositions for every one of our pieces of equipment. So it's right on the back of our price sheets and, you know, very transparent. Where people tend to fall a little bit short, though, is that's the return on investment on the equipment, just the extraction system. And, you know, if there was a pressure point or a failure point that we would see startup companies in particular going through, it's the lack of recognition that the extraction is just one piece of the puzzle, right? There has to be an entire business process that has to be put together all the way from supplying the feedstock or securing the feedstock to the extraction to refinement, to branding, to marketing, to packaging, the distribution agreements, cash management, profit and loss.
There's, you know, all of these extraction companies are businesses. And if you don't have every single piece of that business in place, you're gonna fail. And that's where talking about return on investment in the equipment is a little bit narrow-sighted. It isn't the full picture. But nonetheless that, you know, taking the return on investment from our equipment that we publish, combining it with return on investment and/or cost modeling for a business, that's really the total picture.
Matthew: Now you mentioned you're just shipping your 500th unit. Congratulations on that. Now you come across a lot of different business owners and I have, too, and businesses are just like people. They all have different styles, different strengths, some have trouble answering the phone while others seem like they're capable of accomplishing anything. When you think about the experience you've had with different businesses entering this field, is there any common trends you see amongst the ones that succeed and the ones that fail that you've kind of noticed like, "Hmm, they trip up here," or, "They're successful in navigating this"?
Andy: Well, yeah, and it varies. You know, that's one of the challenges of being in this industry. You know, there's so many people that are attracted to the green rush that they come from all walks of life and all experience levels, but very, very few of them come from the processing or manufacturing of consumer goods. And when I say "consumer goods," I mean more like food stuff or edible products. It's amazing to me still how few people have any kind of industrial manufacturing experience in a food environment. Just very, very few of our customers have that type of experience. And, you know, today the FDA isn't playing. The FDA is not involved, but it's only a matter of time before those kinds of regulations start to come in and that's gonna be a huge hurdle. The people who've had the foresight to see what's coming down the road, whether it'd be, like I said, FDA, have the foresight to understand cash management, especially in these new states like the East Coast states that are passing medical marijuana laws with extremely strict regulations.
The ramp-up time is long, right? It's not like a medical state that went recreational and there's already an established patient base and/or consumer base. Just take Ohio as an example. There are zero patients today in Ohio. And, you know, the amount of time it takes us to get from zero to 200,000 patients is a huge unknown. If you don't have the cash reserves, if you didn't have the business chops essentially to be able to manage and/or mitigate the unknown which is how long is it gonna take us to go from zero to 200,000, you're gonna fail or you'll run out of money because there aren't enough patients there. Those are the kinds of things that have to be thought through. There's definitely a technical aspect from the extraction. There's certainly a formulation aspect, but I think probably more important is understanding the long-term business aspects and also the marketing and branding. I mean, that's a really, really important element. You can make oil the best oil in the world, but if nobody knows about it, you're not gonna sell it.
Matthew: Yeah. Great points, and make it consistently so they know what to expect every time they open up a package from your business.
Andy: Exactly. Exactly. And that's not easy, right? So it doesn't mean just running the same parameters. It means knowing how to adjust to changes in incoming feedstock, right? So remember we're talking about a plant here and those plants aren't gonna be the same every single time no matter how much you want them to be. But understanding how your equipment extracts, you know, the different incoming feedstocks and then ultimately being able to modify your manufacturing process to produce ultimately the same product at the end, that's the real skill.
Matthew: Now how about throughput and maybe you could talk a little bit about how big of an extraction solution, how people get the right fit for their need. How does that work? Do you say like, "How much plant material you're planning on processing?" "Are you gonna be running 24/7?" I mean, what questions do you typically run through?
Andy: Yeah, let me tell you what a common conversation that we're having here recently will be as, you know, somebody will call in and we'll just say, ''Hey, this is Apeks Supercritical, how can I help you?'' And they say, ''I'm a hemp farmer. I've got 5,000 acres or 50,000 acres of hemp. I need your biggest extractor.'' And we say, ''Oh, okay. Have you done any extractions yet at all?'' And, you know, we typically hear a long, long silence at the end there. And then they finally come through. ''Well, no, I've never done an extraction.'' And that's a huge red flag for us. Right. That's a major problem. Bigger is not better. There's a huge misperception in the extraction space that the bigger the system is, the better it is and the more throughput that it's gonna have, and throughput and size can be unrelated. Right. The bigger the system, think about it from a volume standpoint, right? You gotta you got a 55-gallon drum and you've got a 500-gallon drum. Right. You can put significantly more material in that drum, but it doesn't necessarily mean that material's gonna be extracted faster unless there's a way to get solvent in and solvent out faster.
Right. So just the volume of the container, the "size" of the extraction system isn't the way to judge throughput. Throughput is really how much CO2 flow rate can go through, how much ethanol flow rate can go through. Right. And then it's also the secondary processing side. So how long does it take to do the secondary processing or the refinement of those oils? So bigger doesn't necessarily mean better and they're also, you know, smaller pieces of equipment have advantages over bigger pieces of equipment when you're talking about throughput and processing operations.
Going back to the submarine days, you know, submarines have two of everything, right. There's two turbine generators, two propulsion generators. There's two life support systems, oxygen generators. There's all these different systems that are onboard a submarine, have duplicate systems on them. And the reason for that is if one of them fails, our submarine can still maintain a one to one surface-to-dive ratio, right? To make sure that if we go down, we come back up every single time. If we didn't have two of everything and there's a failure, we're down, right? And that's life and death in a submarine.
Manufacturing doesn't have that life and death thing, but it can sure be a pain in the butt if your piece of equipment goes down and you don't have a backup. And so the scaling approach or the production throughput approach that we always recommend for our customers is not don't go by one of the biggest giant things you can get your hands on. It's start small, do some test extractions first, then scale to the next size up. Pick a manufacturer that has a scalable technology so you can make sure as you buy the next piece of equipment that it isn't gonna change the operating characteristics or the quality of the output.
And then once you get to a point where you just need the capability, further capability, you don't need to do experiments and trials anymore, get redundant systems, right? Buy two, buy three medium-sized systems as opposed to one large system. What that does is it gives, you know, the backup capability. And it also does things like spare parts. Right. Now you've got one kit of spare parts as opposed to three. And those spare parts can be used across all three of those different pieces of systems. Generally the systems are smaller, so the spare parts are cheaper.
And one other really, really critical point, especially if you're talking about CO2, smaller systems, smaller vessels in particular mean thinner walls, and who cares how thick the wall is of the vessel? Well, thinner walls, most of these systems are stainless steel. Stainless steel does not conduct heat very well, so you don't get good heat transfer or thermal properties. Thinner walls are able to overcome that better, faster because there's not as much material that had to transfer that heat through. So we always recommend going with smaller vessels because you can go from subcritical parameters to supercritical parameters much faster than having one giant vessel that you essentially have to think of more of a startup, it's like starting up a power plant, right? You've gotta get it going, it takes three, four hours to get the thing heated up and get it equalized. And then you have to run it for a long, long time, right. And making changes to it on the operating characteristics are very difficult. So these big systems that people are considering purchasing, that have the capability of one system doing all the throughput that they need sometimes isn't the right solution.
Matthew: Yeah, I agree with you. Mentally, I think I would make that mistake, too. Just always throw more horsepower, more cow bell at every problem. So that was a good distinction there. I appreciate you making the, like, you know, teasing out those nuances because I hadn't thought about it that way.
Andy: Yeah, and my wife is actually the one that points this out to me frequently. I tend to say, and I think men in general are like this. If a little of it's good, a lot's better, and it doesn't matter what the application is, if a little is good, a lot's better. That's really not a good way to think about extraction and manufacturing throughput.
Matthew: Good points. Now I know that this tax plan that went through at the end of 2017 has more depreciation or, you know, 100% depreciation the first year on a lot of capital equipment. I haven't talked to you about this, but is that something that transfers to the equipment that you're selling?
Andy: Yes. I mean, so this is a capital acquisition. For our customers, buying the equipment is a capital acquisition. And so the ability to do a section 279 write-off is there, but that's been there for quite some time. You know, the bigger challenge for our customers, particularly in the marijuana industry are the 280E tax hits. And so, you know, being creative about taking a financing structure as opposed to doing a capital acquisition is generally the approach that we'll see more savvy companies and/or more financially-smart companies will take, if you finance it, if you rented essentially. So develop a secondary corporation or a leasing corporation that acquires the equipment outside of a marijuana license and then rent or lease that piece of equipment to your marijuana licensee. That rent becomes a cost of good. And so that's a way that a lot of people will try to minimize that 280E burden.
Matthew: So they created their own financing vehicle, another company. Do you offer financing or do you have a third party financing company? How does that work?
Andy: Yeah, you know what? My financing story's kind of funny. But we don't currently offer financing. There's too many other people out there that do it. But it wasn't too terribly long ago that there wasn't anybody out there that was offering financing. Back five, six years ago when I decided to focus on Apeks in a full-time capacity, I had this piece of equipment and I had customers, and the equipment costs $100 grand, but they didn't have $100 grand to throw with the equipment. Now they could make $100 grand on it in a matter of days, but they didn't have a way to get the $100 grand in the first place. So I was basically forced into self-financing a lot of these systems that we produced in the early days. And, you know, I'm not a finance company, don't ever wanna be a finance company. But nonetheless, that's the way it had to go in order for us to survive back then. You know, nowadays there's plenty of other financing companies out there that specialize in doing financing and are much more well-equipped to do it than we are. But nonetheless, that's kind of my history of the financing.
Matthew: So you point prospects to these financing companies as you go through the process of introducing them to your solutions, I take it?
Andy: Yeah. And we've been through, you know, unfortunately, we've chewed through a lot of financing companies. It's disappointing, but as you might expect with most everything else in the marijuana industry, there's some unscrupulous players that are just trying to take advantage and make some quick bucks. The best financing companies have long-term careers and provide support. Brokers tend to be a giant pain in the butt. We try to work directly with financing companies themselves and not really involve brokers because they really tend to muddle it up.
Matthew: They delay the process and just introduce some complexities that don't need to be there?
Andy: Well, yeah, they're looking for their fees. And so, you know, the challenge with a broker is if they're shopping your deal across four or five different banks or private equity firms or whatever it might be, they're doing that. They're shopping it. While they're trying to get a good rate, they're also looking for the best deal for them. And so sometimes they'll say, ''Well, these guys are gonna give me a better deal. They're gonna give me a bigger cut of this. And while the rate may not be quite as high, I'll get a better deal. So I'm gonna push everybody towards these guys.'' When that may not be the best solution for the end customer. I look at consultants kinda the same way. You know, consultants, they should be third party, unobjective, unbiased. Any consultant who says, "Yeah, I get a kickback or I get a cut from different manufacturers, different vendors." And that subsequently is what I recommend as a solution. There's a conflict of interest there and, you know, so the financing brokers, consultants in the marijuana industry, you know, those are red flags to look out for.
Matthew: Interesting. Now, if you could wave a magic wand and solve one problem in extraction technology or take the technology to a new level, what would you do?
Andy: So real-time control is how I would probably answer that one in a short answer. One of the biggest challenges with, with any of the extraction technologies that are being deployed right now in the marijuana space and/or even hemp CBD is, it's kind of this black box, right? You load the material in, push start, it runs for a little while and makes some noise and does its thing. And then at the end, you open up the cup to see how much was there. Right. And there's really no way to tell while the extraction's happening, you know, how efficient it is, what's it bringing out, what rate of throughput is it running at, what efficiency is it utilized at and, you know, are you utilizing all of the power and energy that's been put into the solvent as it's passing through the material.
Those real-time controls and this real-time monitoring of parameters just hasn't made its way into the industry yet. And that's what we're super excited about. You know, we started doing some testing on this almost four years ago and I've kind of struggled to figure how to get it in, but just last month, we had a tremendous breakthrough on real-time processing analytics and monitoring that is gonna revolutionize the automation platforms for us.
Matthew: Wow. That sounds cool. Okay. Now, when you put on your x-ray vision, future vision here, what does the extraction industry look like? How is it different in three to five years than it is right now?
Andy: Well, one, it's bigger. You know, I think you're gonna see a delineation between recreational and medical markets, especially if there's some kind of a change at the federal level. But even without that, you can already start to point to medical companies look more like pharmaceutical operations, whereas recreational companies tend to look more like, you know, alcohol and even, to some degree, tobacco companies. And, you know, the way that they produce their products is different. Pharmaceuticals, you know, clean, pure, single compounding and, you know, taking the approaches to get things approved through the FDA, whereas recreational tends to be more about branding, logos, brand recognition, and a lot of times, cost. You'll have a smaller connoisseur market, you'll have a larger bulk market for what is a lower-quality, cheaper product.
So I think that's the way you're gonna see the market go. The extraction companies are gonna follow suit and support those things. So I don't think you'll see this combination of both, an extraction company providing both medical and recreational products. You know, I don't think the cleanliness standards for the medical side are gonna be low enough to support doing it in recreational efficiencies.
Matthew: Right. So you get a lot of customers asking you the same questions over and over, and probably they're not thinking about things the right way. Like as you mentioned, they're like ''Give me the 10,000 horsepower and one that's the size of a sperm whale.'' And they really need one that's much smaller and much more focused to the task at hand. Are there any other questions you feel like prospects should be thinking about, but they just don't even know how to frame what they're doing yet because they're new to the industry?
Andy: Yeah. You know, the scale... There's two pieces there and we've kind of touched on both of them, so I'll reiterate them here just briefly. But scale is one of them for sure. You know, if you've never done an extraction, you get no business modeling out a million-dollar or a multimillion-dollar extraction platform. There are so many things that you just don't know about the extraction parameters and the response to your feedstock without doing smaller scale testing first that...it's irresponsible. Right. You're not doing your investors or your money guys any favors by taking that approach. Start small, scale up and, you know, find a scalable platform that's been proven over time.
The other one is, that we touched on earlier, is the fact that, pay attention to what your end product is. I can't stress that one enough. Making sure you understand what you wanna make rather than what extraction equipment you wanna start with. It's so important and vitally critical to the success because you have to think through, before you start, you have to think through all of the different steps that it's gonna take to get to your end product. One of the huge, as you mentioned, lots of people call us and we get a lot of first-timers calling us, which is fine. We enjoy talking to them. We enjoy helping them through this process, but, you know, one of our qualifying questions is, "Have you done an extraction, yes or no?" And, "If you haven't done an extraction, what do you want to make? What's your end product gonna be?" When the response is, "I want to make everything, but I've never done an extraction," that's a huge red flag. Pick something. Focus on it. Start on whatever, you know, whether it's vape pens, whether it's dabs, whether it's edible products, whatever it might be, pick one, focus on it, get really good at it, then start to expand your product line. And those are the guys that we ultimately see succeed.
Matthew: That's funny that you mentioned that. I was a reading a story about how Bill Gates' mom, before she passed away, got Bill together with Warren Buffett for a dinner and they're all sitting around and Bill Gates' mom said, ''You know, what do you two attribute your success to?'' And they both at the same time said, ''Focus.'' And then laughed because it was, you know, it's not what they're doing so much as what they're not doing or, you know, however you wanna look at that. So that's interesting.
Andy: Yeah. I, for a very brief stint in my career, I did a little bit of work for Apple, and then talking to the guys who were deep-in with Steve Jobs back in the day. That was their one thing that they always went back to, on what Steve Jobs was good at and that was saying "No." He was really, really good at saying no.
Matthew: Yeah. They said there's another saying there that "Genius loves constraint." Like, if you have no constraints and everything's wide open to you, like all the permutations and possibilities, it's just overwhelming and then you can't focus.
Andy: And if you're smart enough to be able to deal with all of those possibilities and can actually think down the tracks of the different possibilities of what you could produce, you know, next thing you know, you're off in outer space someplace. I've got a partner who's kinda that way actually. He's just brilliant and if you put something in front of him, he will have 17 different ways to utilize it and different solutions for how to do it. And by that point in time, we're so far off track of where we should be as far as an operational program that it doesn't even matter. So, you know...
Matthew: But at least it's entertaining, though, right?
Andy: I mean, it's fun to watch, it's fun to listen to and it's impressive just because this guy's just so incredibly intelligent. But, man, oh, man, the herding cats saying is, that's exactly what it's like. When we're trying to have an operational conversation about how we're gonna move efficiencies from 1% to 3%, that's not the guy you want in the room.
Matthew: Right. It's good to have the dreamers, though. It's like, "Hey, this is a whiteboarding session. Nothing's off." So it's good to have both. I guess that's what makes humans so interesting.
Andy: Yep, and it takes all types.
Matthew: Yeah. Well, let's turn to some personal development questions here. Is there a book that's had a big impact on your life or your way of thinking that you'd like to share?
Andy: Yeah. I got turned onto a book called ''Extreme Ownership'' by one of my advisors about a year, maybe two years ago now. And it's a book by Jocko Willink and Leif Babin. Jocko and Leif are Navy SEALs and they spent a lot of time in Afghanistan and in Iraq and places like that. Recently, I guess not recently, a few years ago, got out of the military and kind of wrote a book about the SEALs and what it's like being in the SEALs and how that translates into business and, you know, kind of...the title really gives it all away. It's extreme accountability. But if I was trying to summarize it in my words, ''Extreme Ownership'' is just that anytime anything ever goes wrong, and there's always lots of opportunities for stuff to go wrong, think of it not in terms of why it went wrong and who someone else or what someone else did or what extenuating circumstance happened that ultimately came down and bestowed this problem upon you. Think about what you could have done differently in terms of extreme ownership. Take full accountability for it. Whether you really think you do or not, doesn't even matter. Think about, put yourself in the context of extreme accountability. What could you have done differently to affect the outcome?
And if you put yourself in that situation and you start thinking about all of the different reasons and all the different things that you could have done different, right? Sometimes it's tough to swallow, but when you start thinking in that context and taking extreme accountability, the outcomes start to become different. And that's the real key. If you think, "Hey, you know what? Everything that happened is my fault, right? I could've done this better. I could've done that better," things start to fall into place. And from a culture standpoint, right, your employees, your directors, the guys that are working for you, they start thinking the same way as well. "Hey, you know what? I could've done better on this, so the next time we go do this, I'm going to do this differently, right?" That culture starts to really grow and that extreme accountability or extreme ownership really starts to play out in every aspect of the business, right? It's not just producing or, you know, the individual product, it's engineering, it's customer service, it's cashflow, it's finance. When everybody starts operating at an extreme ownership mentality, you get significantly better results. And that's ultimately how the, that's how the SEALs are as successful as they are. Every one of those guys operates under extreme ownership. Every problem is their problem and they're the cause of that problem and what can they do to fix it? Never place blame on anyone else. Always place blame on yourself.
Matthew: That's a great idea because if you don't take ownership and you project blame onto outside circumstances, you can never improve because you can't control outside circumstances.
Matthew: And it also happens at an executive level where you're saying, "I make mistakes, but I own the mistakes." That's a great thing that, you know, can then radiate out to everybody that's like, "Hey, you know, we're gonna make mistakes, but we're gonna take ownership for them and we're gonna improve." I've had the displeasure when I was younger to work at businesses where the person in the highest ranks did not even acknowledge that they ever made mistakes. And that is, it's so uncomfortable. It's like, "What are you talking about? Everybody makes mistakes. We're human."
Andy: Right. Exactly. So this particular book, this "Extreme Ownership" book, you know, Jocko and Leif do a real nice job of breaking it down into 10 or 11 sections that are all applicable to business. And they tell a story, you know, from their time in Afghanistan where, you know, it's a life and death situation. And then they translate that story to a business situation that they're working with, you know, as consultants on and tie the two together and it's very entertaining. It's engaging. And at the same time, it's an opportunity to learn. I really enjoyed the book.
Matthew: That's a great suggestion. I haven't heard that one before. Now, is there a tool that you consider vital to your company or your individual productivity that you'd like to share?
Andy: Yeah, that one's a tough question. There's about a million different things that I would share. But trying to keep it contextual to the marijuana space, which is in the cannabis industry, cash is probably the biggest tool. As strange as that may sound, you know, a lot of people might say, ''Well, yeah, duh. You know, if we had more cash, then everything would be fine.'' Cash is king, and in an industry where financing opportunities and financing options are limited even for us, I mean, we've had our bank account shut down, you know, multiple, multiple times. We struggled to get banks to give us a loan for even building expansions for our business and we don't touch the plant. You know, our accountant shut us down because we got a processing license now that we do touch the plant. Lots and lots of constraints that ultimately all flow down to cash, right?
And making sure that you got enough cash on hand to be able to survive good months and bad months, but also keeping in mind that the industry is growing and evolving and getting so much bigger so fast that if you're not innovating, you're dying. And so you gotta have cash not only to support your business operations, but you also gotta have cash to be able to invest in your future, your company's future, your business's future. And if you don't do that, and you could do it by getting an investor, right, you can bring on investment. That's what a lot of people do. But if you're like me and you bootstrapped the whole thing, you gotta have a lot more cash on hand than you would normally have for any other business where you can go get things like lines of credit. And, you know, I think there's lots of business systems and processes and accounting software and all that kind of crap, but I really think cash is the tool that can make and break businesses. It does, for that matter.
Matthew: Yeah, it's funny. It's like the oxygen in the room, like, you need that just to continue. You notice when the oxygen starts to get low. So it's vital. There's a book about, I can't remember the name of it, but I'll try to link to it in the show notes that talks about that principle of cash first. And my experience has been with my own businesses and others, is that most businesses fail not because they have a bad idea, but then they run out of cash.
Andy: Yep, exactly. And that's going back to where I was talking about financing, that absolutely almost put us out of business. So we were the 24th fastest-growing private company in the US, back in 2015 on Inc. 5000, and we almost ran out of cash because I had financed so many deals that, you know, I was at a point where I was like, "Yeah, I got all this back order, we got all this stuff, but I don't have enough money to make payroll." And, you know, a huge, huge, huge problem. So that was a big eye opener for me.
Matthew: Now, where are you in the capital-raising process? Are you raising capital? Are you done with it? Where are you?
Andy: So I currently still own 100% of Apeks and I've never taken on any investments. That being said, we're actually looking for opportunities for investments. And, you know, in an ideal world, it's not so much private equity and just coming in and shoveling a bunch of money into it. In an ideal world, you know, we would look for an acquisition strategy. Whether we're the acquirer or whether we're the acquiree doesn't really matter. But as you start to see consolidation of our customers, you know, the plant-touching folks, whether they're processors or whether they're cultivators, doesn't really matter. There's a ton of consolidation going on. That consolidation is gonna carry through into the ancillary supply side, you know, the manufacturing businesses and service providers and things like that. You're gonna start to see consolidation and that's really what we're looking for. Not so much of an investment strategy, more of a longer-term growth strategy to allow us to combine with other similar-sized and complementary extraction companies and/or manufacturing companies to ultimately get into a consolidation area and become one giant company.
Matthew: Very interesting. You're looking ahead. That's great. Well, Andy, as we close, how can listeners reach out to you and learn more about Apeks Supercritical if they're interested in investing or if they're interested in becoming a customer, how do they do that?
Andy: Our website's the best place to start. And that's apekssupercritical.com. And Apeks is spelled A-P-E-K-S, supercritical.com. You can always call us, 740-809-1160. And if you wanna get a hold of me directly, feel free to email me. I am andyj, A-N-D-Y-J, @apexsupercritical.com.
Matthew: Well, Andy, thanks so much for coming on the show today. And as the winter approaches, I'll be thinking about you as you go through a hundred days of gray skies and all the best to you. And when you start to get patients in Ohio, we'd love to have you back on to hear about how you're doing as a processor.
Andy: Yeah, we're super excited about it. You know, Ohio's program has been stalled a couple of times and delayed a little bit more than certainly anybody wants. But it's coming around. You know, we expect that we're gonna open our processing facility in the March of next year timeframe. And, you know, we're really eager to provide medicine to patients. But we're not just gonna make our own stuff, we're also gonna take a opportunities from our 500-plus customers to white label and do what's called commercial kitchen manufacturing where we'll manufacturer things in our facility here in Ohio. But we'll do it according to the formulations of our customers and put it into the customer's brands and packages that might be in California or Colorado or Oregon or other places like that.
So we really see this as not just an opportunity for Apeks and/or Ohio Grown Therapies to succeed, but it's an opportunity really for all of Apeks's customers who've developed brands in other states to have an opportunity to play in Ohio without having to put up the million-plus dollars that it cost us to get this license.
Matthew: Very cool. Well, you'll have to come back on and tell us as that evolves how things are going, because I haven't heard much from an Ohio market because there's no patients, but I can't wait to see what evolves there.
Andy: Definitely. I'd be happy to come back on.
Lars Meijer from Codema Systems Group shares how the top cannabis companies are using automation to radically increase efficiency and profit. Cultivators not thinking this way will be left behind soon.
– Mapping out the lifecycle of your plants
– Creating a workflow
– Building automation around your workflow
– How moving and flying tables enable efficiency
– Reducing input costs
See Codema’s Solutions Videos Here
Matthew: The lion's share of profit in cannabis cultivation will go to the producers that make top shelf cannabis efficiently while maintaining profit margins. So, how does a cultivator become more efficient? It starts with automation and process planning. Here to help us understand more about efficiency in the grow room is Lars Meijer of CODEMA Systems Group. Lars, welcome to CannaInsider.
Lars: Thank you. So now, I got to be a guest on CannaInsider. Matt, thank you.
Matthew: Give us a sense of geography. Where are you in the world today?
Lars: Well, our company is based in the Netherlands and in a small town called Bergschenhoek. And for most people more aware with the Netherlands is near Rotterdam.
Matthew: Okay. And I'm in Lisbon, Portugal today.
Lars: Oh, wow.
Matthew: Yeah. Probably a little bit sunnier than the Netherlands.
Lars: It is, yeah.
Matthew: Yeah. There's a lot of people from Sweden visiting Portugal right now. They said it's already like late autumn there. So they're getting their final sunshine in before returning to the Great White North.
Matthew: But I know you're in the Netherlands. Okay. So let's go here. What is CODEMA Systems Group at a high level?
Lars: Yeah. The CODEMA Systems Group provides automation every essential part inside the greenhouse. So this means for the cultivation systems, logistical side in the greenhouse, water treatment/irrigation, but also software for growers.
Matthew: Okay. And we'll get into the details of that in a minute. But first, tell us a little bit about your background, Lars. How did you get involved in this industry?
Lars: It's actually a quite funny story. When I was young, I studied to become a pilot. I am licensed. But in the past, it was very difficult to get a job in the aviation industry. But in, yeah, where I grew up in a notorious area called Westland, and that's a big part in the Netherlands with a lot of greenhouses. So when I was young, I also worked inside the greenhouses. And therefore, I really liked the business since I was already young. So that's how I...yeah, Instead of flying, I got into cultivation.
Matthew: Oh, cool. I guess there's a lot of similarities because there's a lot of checklists and details that have to be just right. And with what you're doing now with cultivation, there's a lot of details and things that need to be just right in order for takeoff of the plants to happen, a little slower process, but [crosstalk [00:02:48].
Lars: Yes, the growers are getting more and more sophisticated and more higher level than from the past. So, yes, there's a lot of similarities, yes.
Matthew: Well, let's go over how this type of automation improves things. Let's start with energy. How do CODEMA's tables reduce energy cost? And maybe before we do that, maybe just...I'm saying tables and you might say tables or containers, maybe just make a visualization of what you're talking about exactly when we were talking about tables, and why it's important for a cannabis cultivator to think about having tables or containers in their grow operation?
Lars: Yeah. I think, first of all for every grower, you wanna get the highest efficiency for your square meters as possible. And with our containers, that's what we call them, could be completely automated. And when you want a high-level automation, we can create it with containers. It can be moved automatically throughout the grow zone of the greenhouse or a multilayer grow zone. It doesn't matter. And our containers are like an aluminum frame and they can hold like a plastic bottom tray, which can be filled with water like an ebb flow system. So the water rises a few centimeters, and it flows out automatically of the container again. And this way, the crop on the container can retrieve its water through its roots. And there are, like, three options you can handle these containers: manually, semi-automatic, or fully automatic.
Matthew: Okay. And so they're kind of like manageable workspaces, these tables. And how big is your average table?
Lars: Yeah. Like it says, we are a custom-made company. So we can do whatever the customer wants but it mostly depends on the base size of the greenhouse. So for example in the base like eight meters wide, we usually take a container a little bit less than half of the base. So we get two tracks of containers inside one bay.
Matthew: Okay. Yeah. So you have these, I will call, manageable workspaces in the table or container, we'll just call them tables. And then there's a design automation where you plan out the whole seed cycle process, and these tables kind of move along like a conveyor belt or an assembly line in an auto manufacturing where the whole process has been thought out and these tables go where they're supposed to when they need to, sometimes even being picked up in the air and moved from one place to another. Do I have that correct?
Lars: Yeah, that's completely correct, yeah. And there are like lots of different ways to handle those containers. But, yeah, those are a few examples. Yes.
Matthew: Okay. Okay, now that we know what the tables or containers are, let's start with why they're important. And maybe talk a little bit about energy. How do CODEMA's tables reduce energy and cost, energy cost specifically?
Lars: Well, I think energy cost isn't the most drastic one because, of course, energy is very important. But those can be more being achieved through solar panels or other ways. And I think the reduction of our system...I think implementing our system is a reduction in the labor cost. I think this one is the most important one, because you don't want any employees or workers inside the grow area.
So handling the containers or, yeah, what you said, the tables or the moving working areas, they can just handle the...they can move inside the greenhouse by itself, and then they go to the work zone where the employees can work on the tables. So they can harvest, they can remove anything, they can clean the containers, and whatever. So I think the reduction of labor is the most important one.
Matthew: Okay. So reduction of labor, keeping people out of a working area is important because humans bring in spores, and bacteria, and all these different variables that are hard to plan for. So when you say labor cost is the most important, how do you walk through a prospective customer on, like, how much less labor they need once they implement a system like this?
Lars: It's very difficult to make it like a hard number. But sometimes, we try to make a calculation with the customer how many plants he is handling at the moment when he's doing it by hand or by a forklift truck. And then we calculate with our capacity how many plants we can handle with our system. And sometimes this may even triple the amount of plants he can handle. So that differs for every greenhouse, and every project, and we calculated each time again.
Matthew: Okay. Okay. So it's very customized. There's no one answer. Maybe, has there been a client in the last year that has told you how much they've been able to reduce labor cost, like any specific examples?
Lars: Yeah. He said, I think it reduces workers, which is hours for like 60% or 65% of his workers, yes.
Matthew: Wow. Wow. And not just that, it's just that it's so repeatable and predictable. When you give like a request to employees, "Hey, go do this, or this." Or, "Start to plan harvest," to do, or that, it's just not as predictable because all these things for human to human communication, there's a lot of things that are lost, interpretation. And when you boil things down to a physical automation process, there is an objective way of seeing how your seed to harvest is gonna happen in a very predictable way that takes some stress and anxiety out of the process, I think.
Lars: Yeah, yeah. And like you said, machines don't make mistakes because we program them the way we want them to work. So yeah, for example the plants are on the table and you always want like, for example, five centimeters apart of each other, a robot always does the five centimeters. And if an employee does it, it might be six centimeters, or four and a half, and it maybe doesn't give the right uniformity in plant growth. So yeah, that's totally correct what you were saying, yeah.
Matthew: Well, let's talk a little bit about error rate like you just mentioned, you know, getting the right measurements. What other measurements do humans make that are then replaced by CODEMA's system? So water, movement, what other things? What kind of measurements and error rate is there that you could talk about at all?
Lars: Yeah. So with our also the climate computers and automation of watering, you can always give the same amount of liters of water to every table. And whenever there's like an employee walking around with a hose, he has to count for himself and see with the eye. But that's never so precise as a machine. And that's the same for everything also with climate, temperature, also walking around inside the greenhouse, the employee might not be paying any attention, and he's walking against plants, it falls over, it breaks down, and especially with the cannabis plants they're really sensitive. So that's why you only want the robots, or the drives, the automation to move the containers around. So, yeah, to keep your crop safe.
Matthew: Yeah, okay. How about yield here? I mean, are you seeing increased yield after one of the systems is put in, or is it just more of a uniform yield because you're doing things in such a predictable, methodical way?
Lars: Yeah, I think it's a combination of both because, like I said, you can plan easy ahead because you know how many plants a robot or a system can handle. And an employee might differ because he's sick or he's not so feeling well on one day or the other. And I think also with the uses of square meters increases with our container system. For example, if you're just growing on the ground, you always need some walking space for your employees to walk inside the greenhouse and to work on the plants. Well, that's not needed anymore because the plants come to the working area, to the people.
Matthew: Right, right. That's hard for a lot of people to visualize. Like, "What are you talking about?" Like, these things are connected like on a conveyor belt, and the workers are standing there, and then a table arrives in front of them to do their work.
Lars: Yeah, yeah, it's fully automated. So it's just, you press a button or you sit behind the computer, and you're like, "Okay, this container needs to be harvested." And they're like, and I know two, three, four people standing on a position and the container or table steps by with the plants to be harvested.
Matthew: Wow. Okay. Now, what about if I want to add nutrients to the water for the roots to suck up, is there a way to automate that process too, or does it just have to be done at the water before it's delivered to the table?
Lars: Yeah, that's mostly in combination together with a water company. So yeah, you can store your clean water, you have a fertilizer, or a mixing machine which can clean the water as well, and that's all before it's transported to the tables, yeah.
Matthew: Okay, okay. And how do your systems work with the track and tracing of plants because it's really...you know, in North America, cannabis plants are like plutonium. They treat it like it's the most scary and harmful substance to society. And so everything has to be tracked and traced down to the tiniest detail, while you look at something like alcohol and you can just walk into any store and there's no safeguards, whatsoever, but somehow, this plant it's on lockdown. So what about the tracking and tracing because people are very interested in making sure that, you know, everything gets tracked and traced properly?
Lars: Yeah. I think we got a lot of questions from our current customers for the track and tracing. And in the past, of course, it was needed and it was asked for the growers. But like you said, for now in the cannabis industry, it's way more detailed than it used to be. And what we try to work with was with barcodes. So, in every table, so in every aluminum frame, usually there's a barcode. And in the PC, so in the PC control, you can see wherever the container has been.
So for example, in week five, it was located in bay five, and in week six, it's was located in bay four. And therefore, you can always see what happens to the container. So for example, one of the crop experts walk inside the greenhouse, and it's like, "Oh, wow, this batch isn't good anymore." He can just scan the container and sit behind this computer, and checks, "Okay, well, this isn't a good batch. Just remove it from the greenhouse," and this way, you can track and trace whatever happened to each plant.
Matthew: Okay. So that's software you said that, for example, the person sitting behind the computer, that software comes with CODEMA, with the whole system when you purchase it?
Lars: Yeah. Yeah, it usually does. We always ask the customer what he wants. If he has his own software, it's also fine. But yeah, of course, when you can place it in one company, the whole package, yeah, why wouldn't you?
Matthew: Yeah. Okay. And then how are the systems installed? Is that something that you do together with the customer, the customer does it, how does that typically work? How does that breakdown?
Lars: Yeah, differs per every project actually because each customer has his own wishes. Like, one customer has a lot of employees and technical guys. And he's like, "Well, I can do most of the installation by myself." But some others, they want nothing to do with it. So they just say, "Okay, you got all the responsibility and you have to install it." Well, and in most projects when we are overseas, we use local installation companies which have been working over decades. And so we know that they have our high standards. But in order to check everything, we always send a supervisor. So if we make an installation, for example in North America, then we use local companies to install the system. And then our smart guys for the electrics and the supervisor, they go ahead, and test the system, and check everything is done.
Matthew: Okay, that makes sense. Now, if a business owner was thinking they wanna have one person on staff that has the skills to maintain a system, an automation system, what's a good skill set to have? I mean, electrician fixing vending machines, a robotics engineer, mechanical engineer, what's the type of person, the skill set that's usually most helpful for maintaining these type of systems?
Lars: Yeah, I think you need two. So one mechanical, and one electrical. Those are the two most important ones. And usually when we are done with a project, we try to train two or three people who need to work with the system every day. So for example, like a company leader or one of the management's which has to work with the system every day, we train them as well.
Matthew: Okay, okay. And maybe could you talk about the most common application because there's a lot of growers that will be listening that they have anywhere from, let's say, a 500 square foot grow to a 5,000 square foot grow. And then there'll be some that have much bigger too. But what can you kinda tell them in terms of how this can really help their business, you know, and if they make the decision in the next six months? Because most people have to budget forward, go through the decision-making process. I mean, can you tell us what they get on the other side, what's the biggest benefit they'll feel?
Lars: Yeah, I think the biggest benefit is, like, you get the highest efficiency of your growing area. And for example, if you're just a small grower which is, like you said, a few hundred square meters, we also have other solutions. You don't need the moving tables around. We have lots of other ways for also small growers to increase yields, to raise up the plants so you can work on them with walking heights. And like you said, when you have a lot of square meters, well, then you do it fully automatic. So again, especially in a medicinal cannabis, you don't want a lot of people working, cross-contamination, whatever. So therefore, I think mostly the hygiene and the efficiency of the routing in the plants is the biggest benefits, yeah.
Matthew: Okay. And so when you're spec'ing out what system makes sense with a customer, what does that initial consult look like? How do you map the needs of the customer to then the capabilities of CODEMA systems?
Lars: Yeah, I think when we first start whenever we get a customer, or a potential customer, we ask a lot of questions. And then there'll be like 5 or 10 questions heading to 50 questions. So for example, "What's the floor gonna be like? How big is the greenhouse? What's your automation level you want? What type of crops? What's the crop cycle?" And I think we usually spend half a day just discussing with the customer. And then I go together with engineers, we make first draft of the drawing. Then we go back, I don't know, maybe two or three weeks after. And we have another discussion, so okay, maybe something has changed, he talked with another grower, and he wanted to change the cycle. And this way, depends on how much changes, we make a final plan. And whenever the final plan is ready, then we go into a quote, and etc.
Matthew: Okay. Now, is working with cannabis growers much different than working with the other type of indoor farmers you work with?
Lars: Yeah. It's quite different. Of course, it's...yeah, because it's a medicine and just like with vegetables as well, the hygiene level is way more important than we are used to. Our companies originated from potted plants, so like from the orchids, and other stuff, and green plants. And then a high-level of hygiene isn't very important. So that's I think the most different from our current customers. Yes, the hygiene levels, yeah.
Matthew: Okay. And are there any companies in North America using your tables now that you can mention?
Lars: Unfortunately, due to NDA's signed between us and the companies, I'm not allowed to mention any names. But what I can say is that there are few of the largest growers in the top 10 who are using and are going to use our systems in the future.
Matthew: Yeah. And I do know a few names myself. That's how you came on my radar. So there are some good ones doing that. Okay. Now, where do you see automation and indoor growing in the next five years going...where is it gonna go? Can you kinda tell us where that you think the future is? And I mention that because, you know, in talking to people from the Netherlands, it's funny, there is almost like a...everybody really thinks about cultivation or a lot of people do. You know, most adults I talk to from the Netherlands maybe because they see greenhouses everywhere just kind of have a low-level understanding, just everyday person of indoor growing, and so forth. And then there's, of course, a lot of experts there.
So I think the culture you come from is...you know, in Colorado, we say, "Oh, you know, people from the Netherlands, they're 10 years ahead in terms of their technology." And that's why a lot of times, they go to the Netherlands to try to get solutions. I think it's interesting how the cultures evolve that way. I think it's because...or maybe I should ask you why you think that is, is it because, you know, there's a ton of people in a very small area? And that area is below sea level. And there's just a lot of risk factors that need to be mitigated. So it's something that you're very aware of. Why do you think that is?
Lars: I think that that's a big issue, like we're below sea level, and we're a pretty crowded country here in the Netherlands, and we have always been a very picky or needy people, we're very critic, and also to ourselves, and to the food we eat. So we need food to be clean but it also needs to be good and you're not allowed to use any pesticide. So we're very needy as Dutches [SP] as well. And I think with the multilayer and indoor growing, it's still quite new. But for us, as a company, as CODEMA, it's not new. We've done it over decades. For example, in the tulip industry, we have done it's already several times with, I don't know, seven levels high of multilayer growing indoor.
And also for lettuce as well, we have done also seven-layer high with LEDs, etc. So for us I don't think it will change a whole lot, but I think the growers, they need to change their mindset and that the technologies for climate control that they are evolving really fast. So the lighting, humidity, air flow, I think that's where the evolving needs to take place in the indoor growing multilayer.
Matthew: Very cool. So everything is gonna just get whatever it is now, it's is gonna be more so. I mean, I keep on thinking there's gonna be a process where plants are, as they move through these tables, they'll be observed by cameras that can look for pests, and diseases, and recognize that, and then call attention to it through software or some other means, and maybe even predict that before it happens. So I think, you know, hopefully that's the way we're going. And then maybe even integrating automated trimmers right into the process, curing and trimming, all into the process. Now, I mean, a human has to intervene now, I imagine, you know, to cut the plant and then go through the drying and curing process. But do you see that all merging into one from after harvest to trimming, curing, all that happening in an automated way?
Lars: I think so. Yes. But it's not like it is already done by tomorrow. Just for example, take the bell pepper industry, and no one would have thought 20 years ago, that it'll be in robots, automatically harvesting bell peppers. And see now, I think you see one year ago there's robots automatically harvesting bell peppers. So I think there's an...of course, there's a possibility to automate everything. But I think for the cannabis it's gonna take a while because it's very sensitive crop and it's also very expensive. You don't wanna waste anything. So I think for now, people are a bit scared to automatically handle the plants and rather do it by themselves by hand. So just, yeah, to be more gentle with the plant.
Matthew: Yeah. Yeah. This automation is also kind of a consequence of higher and higher minimum wage. I mean, when companies see that the cost of the minimum wages are going up, they say it's better to invest in automation and save on those costs. Unfortunately, it's an unintended consequence of some policies in certain countries. I noticed in Europe, for example, whenever I go into McDonald's which is not that often, but I do like to just poke my head in and see what...and now, it's just all screens. You place your order on a screen at a kiosk and there's just no people, particularly you see that in France but elsewhere too.
Lars: Also in Netherlands, yeah.
Matthew: Yeah. And then a person does give you your food, but they've cut back massively. And now, if you go onto YouTube too, you can see that there's burger-making robots and machines, you know, work 24/7. So I don't know what the answer is and how we're gonna help reskill and retrain these people as they kinda get replaced. But I don't think those are jobs people really want to have anyway. So I think that's an opportunity to kinda bring them up to another level.
Lars: Yeah, I completely agree. And what you're saying with the minimum wage, that's why our systems aren't viable in every country. For example, in the past in Asia, their minimum wage was really low so they were like, "Well, why would we invest millions of Euros into a system when we can just hire a few cheap Chinese people?"
Matthew: Right, right. Yeah. And that's changing now though too. China is not necessarily a low-wage country at least in the big cities anymore, it's not, but certainly in the countryside, yes. So Lars, let's go to some personal development questions. I like to ask guests a few 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?
Lars: Yeah. I was thinking about it. And during high school, I had a special programs called IB, International Baccalaureate. So it's for Dutch people who want to improve their English skills and just continue with flow. We had to read a book, it was called, "Nineteen Eighty-Four," and was written by George Orwell. I don't know, have you read it?
Matthew: Yeah, very familiar with it. Yeah.
Lars: Yeah, yeah. It's just so amazing. It was written in 1948. And it just showed the thought of a possible totalitarian society in the future and how scary it may seem. It looks so accurate nowadays. Big Brother is still watching us. And technology is amazing, don't get me wrong. After reading that book, I now always think twice before I put something on the internet.
Now, let's move on to a tool. Is there a tool web-based or physical that you consider vital to your day-to-day productivity apart from CODEMA tables?
Lars: Yeah, apart from CODEMA tables, yeah. I have sort of a calendar at home. And I don't think it's very funny for you guys, but they're like with a lot of Dutch sayings. If you translate them into English, they sound really weird.
Matthew: Okay, let's hear one.
Lars: Yeah. For example, you have the English saying, "It's raining cats and dogs." Well, that's perfectly normal. If you translate the Dutch version, it's called, "It's raining pipe steels." And for us, it's like, okay, Het regent pijp staal, it's raining pipe steel. So for English, it sounds very funny. And also for example, "Maak dat de kat wijs." This is a very common Dutch saying, but it sounds really funny in English.
Matthew: What does that mean? I didn't catch that.
Lars: Make that the cat wise. I think it's like, if you say something and I don't believe you, then I'm like, "Okay, make that the cat wise."
Matthew: It is weird. It is weird how like sayings and expressions, you know, you just have to understand their meaning or it's just crazy. But then when you try to pick it apart and dissect it, it's like it really doesn't make sense.
Lars: Yeah, that's really funny.
Matthew: You just have to know how to use it in context. Well, cool. Well, great talking with you, Lars. As we close, I'm sure there's a lot of listeners that will wanna reach out and find out if CODEMA is a fit for their grow. How can they do that and learn more, and maybe watch the videos and see what the tables look like?
Lars: Yeah. I think it's first, you could check our website, and it's called www.codema.nl. It has a lot of videos. So also for our other projects all over the globe, for example in China, Europe, but also the states, yeah, there's also our contact information over there, in need of questions, so you can always email or call us. So our website is www.codema.nl.
Matthew: Great. And how do you spell CODEMA? Can you do that, just letter by letter?
Lars: Yeah. CODEMA is C-O-D-E-M-A.
Matthew: Okay. Well, thanks so much. I really appreciate it, Lars. Good luck with everything you're doing. This is really exciting time and just an amazing opportunity to streamline the workflow. I mean, I get tingly looking at an automated grow like this. It's just an amazing thing to behold. So I encourage people that have an inkling to move in that direction to check out CODEMA. And best of luck to you, Lars.
Lars: Yeah, thank you, Matt. It was an honor and a pleasure to be on CannaInsider. And good luck with everything as well.