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Expanding an Infused Product Brand Beyond State Lines

kristi knoblich palmer kiva confections

Kristi Knoblich Palmer is co-founder and COO of Kiva Confections. Kiva is one of the top brands of infused products in California. Kiva’s quality, ingredients, and reputation is allowing Kristi and her husband to expand beyond the state lines of California. Listen in as Kristi describes the challenges and opportunities associated with infused products.

Learn more at:
http://kivaconfections.com/

Key Takeaways:

[1:13] – What is Kiva Confections
[1:46] – Kristi’s background
[3:02] – What changed for cannabis businesses on election day
[3:52] – Market progression for Kiva Confections
[5:13] – The birth of Kiva Confections
[6:38] – Different categories of the California cannabis market
[10:21] – Cannabis prices in California
[13:22] – Kiva Confections’ product line
[16:13] – Kristi talks about a CBD only line
[18:21] – Concerns around CBD extracted from hemp
[21:22] – Kristi talks about two frustrations she would eliminate from operating a business
[23:38] – Kristi predicts the future of the edibles market in California
[25:00] – Kristi talks about expansion plans
[26:29] – Kristi answers some personal development questions
[31:37] – Contact details for Kiva Confections

Important:
What are the 5 trends that will disrupt the cannabis industry in the next five years?Find out with your free cheat sheet at https://www.cannainsider.com/trends

Read Full Transcript

The citizens of California have cast their ballots and voted for recreational cannabis. As the market turns from medical to recreation, edibles companies that already have a footprint in brand recognition in California have an early adopter advantage. Here to give us the lay of the land in the California edibles market is Kristi Knoblich Palmer of Kiva Confections. Kristi, welcome to CannaInsider.

Kristi: Thanks for having me Matt.

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

Kristi: Sure, so Kiva Confections is located in Northern California. So we’re in the Bay Area, and we serve the entire California marketplace. We also have our products available in Arizona and Nevada and just recently in Illinois.

Matthew: Yes, I read about that yesterday. Congratulations.

Kristi: Thank you.

Matthew: What is Kiva Confections? What do you make?

Kristi: Kiva Confections is a chocolate manufacturing company. So, we infuse medical cannabis with chocolate. We just stepped out of chocolate for the first time with a mint. And really our goal has been to kind of redefine what a cannabis confection is and make products that are safe and tested and delicious and also professionally packaged.

Matthew: Okay. And what’s your background? How did you get into this business and come to start Kiva?

Kristi: So, we don’t really necessarily have backgrounds in food or really even in business. My partner and I got started in 2010, the end of the year. And we graduated from photography school, needed another source of income so we started a cultivation in our garden shed, and we needed another way to stand out in the cannabis world. So, back then people were cultivating and providing their plants and their flowers to the dispensaries, but we really noticed that there wasn’t a safe, trusted, reliable, edible product that we ourselves would buy or that I might share with my friends or with my mother-in-law for example. So, we really identified edibles had a lot of potential and a lot of opportunity for improvement.

Matthew: Okay. So that explains the photography. So do you do your own photography for your website and everything like that?

Kristi: You know what, not so much anymore, but we used to.

Matthew: Okay. And can you give us an overview of what changed for cannabis businesses and consumers on election day back in November?

Kristi: So what changed in November is now we have, now in California we have recreational cannabis. So, at this point, and that was six months ago, so six months later we have the system for sales of recreational cannabis is not yet implemented. That is expected to come in January of 2018. So, what you can do right now, what has changed so far is adults over 21 can have cannabis in their possession and they can gift it to each other. So, we don’t have a sales system just yet, but it is legal to possess.

Matthew: Can you take us back to what the California market was like for Kiva when you started and then compare it to what it’s like now?

Kristi: In 2010, cannabis was very underground. People, businesses and patients alike were afraid for their safety. You didn’t want to be the company with a billboard next to the freeway or even a magazine ad in one of the cannabis publications. So, it was very underground. The foundation for businesses and for patients was a bit shaky to say the least. And so people didn’t really feel comfortable in the marketplace. And so I think now, fast forward six years, people are really starting to understand how cannabis is going to fit into our culture. It’s becoming more and more normalized, and we’ve got laws coming very soon, which those regulations and laws for cannabis businesses are going to give that sturdy foundation that we’ve been lacking for so long.

Matthew: You probably had one idea what the infused product business would be like when you started Kiva. It was just an idea and then a totally different idea once you’re in it day and day, in the trenches. How did it differ from what you thought it would be and what it’s actually like?

Kristi: Well when we started it certainly wasn’t easy. We started in our home kitchen and we worked as many hours as we had to to make deliveries and to make the product and to bring it to our dispensary customers. So, early on I knew it was going to be really hard and a lot of work. That part of it certainly hasn’t changed, but what has changed is I think the opportunity in the marketplace is incredible, and I don’t think I really ever could look that far into the future back then to really try and understand how big the marketplace was going to be.

Matthew: Now are you vertically integrated in grow your own plants? How does that work.

Kristi: So, we’re not vertically integrated. We do our own distribution, but we do not do our own cultivation. So, we work with cultivators to grow up to our standards and provide us with materials that meet the specs that we are happy to put into our products.

Matthew: Now the California legislators have created a lot of different categories of cannabis businesses. Can you tell us about a few of those and what you think about the different categories?

Kristi: Sure. The few main categories that stand out are cultivation, manufacturing, distribution, testing and dispensary, which includes delivery service as well. I think one that stands out, which I think is a great category, is the small manufacturer. And a lot of cities, for example, have a cottage license for small companies that are looking to get into the industry on a very small level. So, I think that is great for entrepreneurialism. I always think back to how when we got started, we were tiny, and that opportunity should be accessible by people of all levels.

The other one that’s unique is the distributor. The distributor is very controversial right now because in the medical laws it says that manufacturers but not also be able to distribute. One of Kiva’s ways of getting into the marketplace was both manufacturing its products and doing distribution. So, we’re fighting really hard to protect our ability to also distribute our own products and the products of other companies.

Matthew: Yeah, you say it’s controversial. I’ve heard other people use not so neutral words, like they swear when they talk about it and they’re frustrated because it’s like, hey this is not plutonium here. We don’t need a separate category of distribution. Do you think that’s just going to add cost to the market?

Kristi: Yeah. Cost is a big concern, also stifling innovation. So, Kiva for example, we may try out a new flavor and we want to take that flavor to maybe ten of our dispensary customers in the market and see what think. Do they like the flavor? Collect their feedback. But if you’re going through a large manufacturer, sorry a large distributor, there isn’t a lot of incentive for them to perform those types of tests for you. Also they’re working on a much larger scale. So, if you’re a small company and all you can serve are ten dispensaries to start off with, what distributor is going to be able to bring you into their fold if you’re on such a small scale and they’re on such a large scale.

So, I see that allowing manufacturers, I think they can hold the distribution license. I don’t think the license category needs to go away. They should just also be able to do both functions, and I really feel very passionate that that’s the right way for the industry to grow and to flourish, and I think it’s the best way for us to move forward.

Matthew: Are legislators getting that feedback or is this pretty much set in stone that there’s going to be this distributor level or category?

Kristi: They are getting the feedback. I think the opposition was a little bit louder and came before us. So, a lot of the legislators that you speak with they haven’t necessarily heard our side of the argument yet. So, we’re still kind of fighting that uphill battle, but I think, I really feel we’re on the winning side of the argument, and we have the interest of the greater industry and that’s starting to catch on with the legislators.

Matthew: How do you feel about the price of cannabis, particularly in California where it’s such a big market? Do you feel anecdotally that it’s going down at the wholesale level or what’s happening to prices, under pressure?

Kristi: Pricing is going to be a really interesting thing to follow over the next few years while regulations are unveiled. So, I think if California continued on a path that it’s on without regulations we would see cannabis continue to fall in price, but I think the industry is in for a really big shock come January 2018 when regulations do roll out. There are a lot of regulations that are very strict and will require some additional talent to manage those. Some of the elements in track and trace, for example, or in inventory reconciliation. So, I think the price of cannabis is going to potentially go up for a short time, while regulations are being put into place, and people and businesses are figuring out how to handle those new costs.

Matthew: Okay, so at least initially it will rise, then maybe the dust will settle and the dynamic might change, but that’s interesting. We saw some of that in Colorado too when there was growers that met the testing requirements and they were able to charge a premium for a period of time, and then for six months thereafter maybe then the price started to plunge. So, I will be interested to see what happens. Particularly California has so much capital, so much technology and such a strong agriculture background, the confluence of those three things, in the long term, who knows about the short term or immediate term, I’m concerned it’s just going to really go down. Thoughts around that.

Kristi: Yeah. I think if the prices went down, that I would hope that quality would stay steady or continue to increase. So I think if prices fell, but quality stayed or got better, then that would be okay. Also if cost goes down, that means it’s more accessible to more people, and I think that’s a great thing for cannabis in general because it really has the ability to help so many people. So, if more people had access to it, I think that would be okay too.

Matthew: I want to hear more about your products, but before we do that I have one confession. Twice I did this at your booth at the Marijuana Business Conference in Las Vegas. I would go to your booth. I would get a sample of chocolate, then as to not look like I’m eating too much of your samples, I would boomerang around the whole Expo Center and then come back and take another one like I was coming for the first time.

Kristi: No problem.

Matthew: I just had to get that off my chest. So, tell us a little bit more about your products; your bars and mints and bites and so forth.

Kristi: Sure. So, we started the company with our Kiva Bars. We started with a 60 mg milk and dark chocolate bars. About six or so months after that we didn’t double, but we tripled the strength for 180 mg bar, and we added some really nice and interesting flavors to those to enhance the taste and kind of cover up the negative effects that you can get from adding so much THC into your products. Shortly after that we came out with our Terra Bites, which are the chocolate covered espresso beans, also the milk chocolate covered blueberries. Those two products are our best sellers currently. Then just recently we launched the mints. So, it’s our Petra Mint product, and it’s a 2.5 mg of THC, so it’s really part of our strategy to encourage micro dosing and the ability for the consumer to control their dose all the way down to that really small amount of 2.5 mg.

Matthew: Tell us more about the mints. That seems like a great discreet option. How did you arrive at creating a mint?

Kristi: So, the mint came because well when we launched the Terra Blueberries we wanted to take micro dosing to the next step. We also wanted to have a product available for consumers that wouldn’t melt and that was even more portable, and actually the equipment that we used for the mints, they’re molded on both sides in a dye. So it really allows for the most amount of accuracy in the dosing. So, the mints are awesome because you can take that tin, put it in your book bag or your purse without worrying about it heating up too much and melting. And then really the ability to dose yourself, just again, to that right amount. Not too much, not too little. It’s really part of a new way for cannabis consumers to use cannabis, especially those ones who are brand new to the industry and have never tried cannabis before.

Matthew: Yeah. You mentioned carrying them in your backpack or purse. I also use a sequence fanny pack, which also is a third option that you didn’t mention. Would it work for that as well?

Kristi: Yes, it will look great in that.

Matthew: Okay good. So, a lot of people are really interested in CBD and for good reason. Any thoughts about a CBD only line or something like that?

Kristi: Yeah, we get a lot of requests for different CBD ratio products. So, yes we’re always considering the feedback that we get and how we can next incorporate that into another new product line. So, we’ve got something that, I can’t promise that it’s going to launch by the end of the year, although I sure hope it does, but we’re looking more and more into CBD and ratios.

Matthew: Okay. Yeah, I mean I hear a lot about the one-to-one. It’s hard to know what the ratio is exactly what people want. How do you think about that? Do you just look in the marketplace? Do you talk to customers, talk to dispensaries and say what are people asking for, or do you just kind of go with your gut there?

Kristi: Yeah so, we definitely ask our dispensaries and our team internally, as well as patients for their feedback and try to really test the waters and see what the right product would be. For Espresso and our Ginger Bars, we landed on a one-to-one ratio because feedback was telling us that we needed to add CBD, but one fear was that if we added more CBD than THC, that there’s still a learning curve with what CBD does in the marketplace. So, it’s a little bit of a buzz word right now. But we didn’t want consumers that didn’t understand CBD to buy the products and be disappointed because it had a lot of CBD in it and they didn’t feel anything. That’s still something that happens as people try CBD, and they go, oh it doesn’t work. I didn’t feel anything. And you’re like, well that actually means it’s working, but if you don’t have any kind of pain or inflammation, then you may not notice anything at all. So, that was part of the reasoning behind that one-to-one was to get people introduced to CBD, but still feel the effects.

Matthew: Now I know there’s people that are concerned about CBD being extracted from hemp and we’re not sure where that hemp comes from or what circumstances it was grown in. Do you have any concerns about that, maybe from competitors or just in the marketplace in general?

Kristi: Yeah, definitely. CBD extracted from hemp, there isn’t anything wrong with CBD coming from hemp, but what the real problem is is where the hemp plants are grown. Hemp plants are put in the ground in places where the soil quality has deteriorated. They do a great job of leeching out of the elements from the soil, both good and bad. So, what we’ve done with our CBD products is we sourced our CBD from California grown cannabis plants. That way we can go up to the farms. We can dig our hands in the soil. We can meet the farmers and make sure that our CBD doesn’t include some of those chemicals that you are afraid that they might can contain when they’re from another country.

Matthew: What is the farming community, I assume this is Northern California, is it Mendocino, where is it in Northern California? Is it Emerald Triangle, something like that?

Kristi: Yeah. So our plants are from the Emerald Triangle from Mendocino, more specifically.

Matthew: Okay. So, what’s the scene like up there? I hear a lot about it. Is it a pretty active community? Is there a lot of great things going on?

Kristi: Extremely active community. Cannabis is the number one source of revenue for those communities up there. So, it’s a very cannabis-centric community. It’s stunningly beautiful up there. It’s incredible. When you go and visit you wonder why you live where you do, where there’s traffic and noise and you don’t have those beautiful sleeping views and the mountains. It’s incredible up there.

Matthew: Gosh, I hear you because sometimes, I’m in a big city right now, and sometimes I’m like this does not seem like an environment for a primate. It seems like we want to be out running around, barefoot, looking at the ocean and being around trees instead of this artificial construction. So, you can kind of feel your blood pressure drop when you get out into the country a little bit.

Kristi: You really do. You really do. I mean, just thinking about it now gives me chills. I mean, it’s so beautiful up there.

Matthew: And you’ve got such good weather. It’s so nice in Northern California. Anyway, got off on a tangent here. I’m just curious about some of the frustrations because there’s a lot of compliance and a lot of, I’ll just call them hassles. I mean you can’t just focus on creating a great product. There’s a lot of hassles you have to put up with in the cannabis industry, and I like to highlight the hassles because if there’s entrepreneurs out there listening that can solve people’s pain points or a problem, everybody wins. If you could wave a magic want and eliminate one frustration you have about operating your business right now, what would that be?

Kristi: I can only choose one, are you sure?

Matthew: Yeah, for now.

Kristi: Well I’m going to pick two. The first frustration is the one that everybody, it’s the low hanging fruit frustration, which is banking. So, banking is like top headache for absolutely everybody, but that’s what everybody is going to say. So, put that one aside. The second one, if I could wave my magic wand and fast forward us a year, where we had regulations that are rolled out, that would be incredible. Because we keep seeing proposed regulations. We have the governor’s trailer bill, budget trailer bill. So, there’s all these potential regulations being thrown up. And as soon as you see one set of rules, everybody just focuses on that and attacks that and you put all of your energy into giving your opinion and writing whitepapers and trying to give feedback, and it’s a lot. Just to see that those regulations may not even be the ones that end up winning in the end. So, if I could wave my magic wand and fast forward us by a year so that we finally have our regulations, which is basically like our playbook. If we know what we can and can’t do, then we’ll do that. We’re the cannabis industry, we’re really good at adapting, in my opinion. So, we’ll adapt, we’ll carve our businesses out around these new regulations and we’ll be compliant, but that would save me a lot of headaches and a lot of sleepless nights.

Matthew: Gosh, I hear you. One thing I don’t feel like the regulators and legislators have in mind when they do these things is that it prevents business owners from investing. You’re holding off until the dust settles a little bit and you say, well when it’s a little clearer I can then invest with confidence. So, you kind of invest as much as you need to, but not everything you would if there was clarity. So, I think that’s something they could think about a little bit.

Kristi: Yeah, certainly. Exactly.

Matthew: So I’m going to ask you a question. What do you think the edibles market will look like in California in five years because it’s a lot the last five years, what is it going to look like five years from now?

Kristi: In five years from now, I think that, as you mentioned before, the dust will have settled and there will be better products on the market in terms of quality and labeling and the testing procedures that companies are using. So, I think that in five years we’ll have a more professional edibles industry, which will, I think, cater to the patients and the consumers that are purchasing them, and it will also really open up the category. And edibles still have that stigma, people still picture that brownie, Saran wrapped with an Avery label that says, “10X”. So, edibles still have that stigma being unreliable and unsafe. So, so I think in five years we will have made some major headway in educating our consumer base on what the new edible is and how to use them so that you can have a controlled and enjoyable experience.

Matthew: And what are your expansion plans to other markets? We talked a little bit about Illinois. What does that look like?

Kristi: Yeah, so we’re continuing to expand the brand to other states. It’s frustrating, but that’s the way it has to be done. Because if you were a regular chocolate manufacturing company, you would have one hub and one manufacturing hub say in California, maybe one more somewhere else in the country on the East Coast or the Midwest, so that you could serve your markets appropriately. So, it’s very expensive and resource intensive and time consuming right now for companies to expand outside of the state that they’re currently in because you have to manufacture the product in that state. Not only do you have to manufacture it there, you also have to comply with the regulations in each state. So, it really feels like you’re starting a new company in every state that you move in to, even if you find a partner there to work with. It’s no simple, easy task. So, I see out of state expansion as being one of those things that maintains top of the challenges list, until we have federal regulations that allow us to ship across state lines.

Matthew: Kristi, I like to ask some personal development questions to help listeners get to know you better on a personal level. With that, is there a book that has had a big impact in your life or way of thinking that you would like to share with listeners?

Kristi: You know what, I’m just over halfway through with a book on Elon Musk. So I just picked it up, but it’s a great book. Elon Musk is very inspiring in his way of doing things. He doesn’t have the best reputation as a, let’s call it, a nice boss, but he certainly knows how to get things done. And he’s really on a mission. And so I’m looking at the way that he runs his business, not necessarily modeling myself after all of it, but I find that book very inspiring because he just has a straightforward way of getting done what he thinks is the most important thing, which when you’re running a business you’ll get lots of opinions from a lot of people. But if you don’t maintain that clear vision as a leader, it’s really easy to get off track.

Matthew: Yeah, and almost lost everything a couple times, and now he’s got, in addition to Space X and Tesla, he’s got the boring company that’s boring huge holes underneath Los Angeles to alleviate traffic and a neuro lace which is going to connect the human brain to software and hardware to expand our capabilities. I mean the guy is… we got to clone him somehow. That last one is a little scary though. I hope it turns out okay. I don’t know it sounds cyborgish.

Kristi: Pretty incredible.

Matthew: Is there a tool, web-based or otherwise, that you consider vital to your day-to-day productivity?

Kristi: Oh man, I would be nothing without my iCal calendar. I would get nothing done if I did not have my calendar. We have a series of shared calendars, one that my business partner and husband use. So I can throw anything on the calendar that we both need to attend. We have shared calendars throughout our facility and throughout our company, specifically for tours and for project management and for marketing. So, yeah, if it’s not on my calendar, it doesn’t exist. So, yes, my calendar is super important.

Matthew: And reminders are just as important for me. It’s like I need to be peppered with reminders that something is going to happen. I feel like I’ve outsourced my brain to Google somehow.

Kristi: Yes, totally, exactly. It’s like my phone dies and it’s out of commission, I don’t know what I would do.

Matthew: Now are you raising capital from investors at all right now?

Kristi: At this current moment, we are not. Our company has been bootstrapped up to this point, but with regulations coming in 2018, we’re going to have to rethink our approach and be able to grow and not miss out on opportunities. So, potentially by the end of the year, we’ll be looking to bring in some investment.

Matthew: That’s really cool because when I go to pitch forums or different places or see companies raising money it’s usually for brand new startups. It’s not for companies that are already successful. This would give an investor a lot more confidence, like oh here’s a business model that works. They just want to grow it, whereas when you’re starting from zero there’s a much bigger question mark like will this company make even one sale or a profitable sale. So this is nice. I’m sure you’re going to get a different level of investor interested when that time comes.

Kristi: Yeah, I think so. It’s really an amazing time for investors to get into the industry. I’ve got a lot of questions around that lately. People asking is it too soon, is it too late, and I’m surprised when people even suggest that it’s too late because the opportunity. We’re barely at the starting line.

Matthew: It’s like the first day, yeah.

Kristi: Yeah exactly. So, I think once regulations hit, that will really be the beginning for investors to get into the industry. There’s a lot of people, colleagues and competitors in the industry that are actively looking for capital and can’t get enough capital to accomplish what they want and get ready for 2018 and all the growth that we’re about to encounter. So, now is the time. The opportunity is really just beginning.

Matthew: Now, if there’s any accredited investors out there listening, should they just go to the contact area of your website, if they want to reach out to you about investing? What’s the best way?

Kristi: Yeah the best way to reach us is on our website, www.kivaconfections.com. Yeah, they can fill out the… send us an email at info@kivaconfections.com or we have a contact page on there as well. Yeah, that’s also where listeners can find us online and find all of our dispensary contacts that we work with, where they can find our stores or our products in stores.

Matthew: Great, well Kristi, thanks so much for coming on the show today. We really appreciate it. Good luck to you and your husband, and I can’t wait to see you again at the next Marijuana Business Conference and Expo. I might just put out a chair or a chaise lounge and just nibble bits instead of pretending I’m not coming back and eating over and over.

Kristi: Come on by. I love giving people samples, and no one is eating more chocolate at the booth than I am. That is guaranteed.

Matthew: Well thanks, and best of luck to you.

Kristi: Thanks so much Matt. I really appreciate the opportunity.

Expert Architect & Grower Reveals How to Design The Perfect Indoor Grow

matthew gaboury calyxking

Matt Gaboury is head of Design and Systems for CalyxKing. Listen in as Matt describes the most high-tech and efficient grow rooms he creates. He also describes the grow room of the future.

Key Takeaways:
[0:59] – What is Calyx King
[1:57] – Matt’s background
[3:21] – Matt talks about what his work entails
[4:57] – Planning a cannabis grow facility
[11:02] – Biggest mistakes when planning a cannabis grow facility
[13:55] – Matt talks about technology in optimizing workflow
[16:53] – Matt talks about carbon neutral growing
[21:56] – Using intellectual property to help clients
[22:44] – Matt talks about mistakes amateurs make in writing SOPs
[23:31] – Matt’s partners
[24:24] – Grow room of the future
[27:34] – Pursuing a cultivation license
[28:52] – Matt answers some personal development questions
[33:20] – Contact details for Calyx King

Learn more at:
http://calyxking.com/

Free Cheat Sheet
The Five Trends That Will Disrupt The Cannabis Industry
https://www.cannainsider.com/trends

 

Read Full Transcript

How do you design a cannabis cultivation plan that does everything you need to optimize plant health and profit out of the gate? Matt Gaboury from Calyx King is going to help us answer that question today. Matt, welcome to CannaInsider.

Matt: Thank you so much for having me.

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

Matt: Today I’m in my hometown of Seattle, Washington.

Matthew: Very cool and I’m in Vienna, Austria today.

Matt: I wish I could switch with you.

Matthew: Before we dive in on everything you do, can you tell us what Calyx King is?

Matt: Yes absolutely. So, Calyx King is a seed to sale service provider. We are comprised of various different professionals who offer consulting and professional services related to the cannabis, primarily, production and processing. Our main focus is helping individuals in new and beginning marketplaces enter into the new regulated industry through application support, the creation of (1.29 unclear) and employee manuals, as well as what my primary focus is, which is the design, the permitting and the help facilitating the build of these cannabis production processing facilities.

Matthew: And I really want to get into the permitting and specifically the build too and doing that the right way, but before we do that, give us a little bit about your background. What were you doing before Calyx King and how did you come to get started in this?

Matt: Absolutely. We started Calyx King back in 2012. However, prior to that, I was always a bit of cannabis enthusiast. It’s something that’s been around into my life for pretty much as long as I can remember. From inception, my parents were very into cannabis as well, so it was something that has naturally passed along to me. I was an avid user for a very long time, and then I started growing very small scale, probably a little over ten years ago with this one tiny light in my basement.

From there I went back to school for architecture and almost immediately started applying those tools and tips of the trade to designing and building cannabis production facilities. It started off with my own basement by making that a more efficient design and me helping out a friend or two in their basement. And then that evolved into a smaller garage and then into a warehouse and then into some smaller, light industrial type buildings and then we’ve had the opportunity in the last five or six years to grow that in scale, to now have the opportunity to design about 2 million square feet for people around the United States.

Matthew: Wow. Now if we were to look over your shoulder as you work day-to-day, what does your work look like?

Matt: That would completely depend on the actual day, if you were a fly on the wall. It’s definitely a very variable schedule, depending on what’s going on in that particular period. At Calyx we’re very responsive to the rules and regulations that are being released all around the United States, and therefore our business is very much attuned to those changes. So as a new marketplace opens up, let’s say for example most recently Pennsylvania and Florida, we get a big influx of individuals looking for existence in those new states.

So a lot of times my day is dependent upon what is actually happening around the United States. But to kind of boil it down in basic terms, I spend a lot of time in front of my computer and using programs like Auto CAD and REV IT to help design and model these facilities. I’m a really big proponent of pre-planning. An ounce of prevention is worth a pound of cure. So we definitely spend a lot of time doing site visits and a lot of hands on with our clients in order to make sure that we design the best and most appropriate facility for them.

Matthew: When you’re starting to plan for a cannabis cultivation facility, can you give us a sense of how you’re thinking about it, what’s your top considerations and challenges are in your mind and maybe what lenses you’re using to think about it? Because I’m sure the way you’re thinking about it and the way someone who is listening to this right now are very different. So let us borrow your brain for a moment and just think about when there’s a new project. What are you thinking about when you’re thinking about the cultivation?

Matt: Sure. First and foremost it comes down to the site and the location, because no two sites are the same. No two projects really start off on the same design foot. So you really need to start there. You need to start with that foundation. The foundation isn’t really the foundation of the building. No pun intended. You’re looking at the environment conditions, it’s really important looking at the site characteristics, what the opportunities there are, what some of the limitations may be and that could be the actual site itself, the topography, the sun orientation.

In addition, something that I highly recommend people looking into is also your utility providers. What sort of power, water is coming to that site? What sort of sewage requirements are going to be necessary and what some of those permitting and code hurdles may be, because every site has a different building department and every building department is also slightly different in how they look at cannabis facilities. And then in addition to that, we also really like to start at the top level of the business strategy. So, no two cannabis businesses are exactly the same in what they produce, the strains that they grow and the methodologies that they use in order to accomplish that.

So, we really like to start with that specific business’s goals. For example, if your goal is to produce, let’s say, CO2 for vaporization and that is your main product offering, then the way in which you design that facility is going to be much different than if your main product offering is a high class dried flower product. And that’s going to come down and dictate the size of the space and that’s going to dictate the flow. That’s going to dictate a lot of different design elements. So, to wrap that back up, I definitely encourage all people to start off at the very macro level, whether that be the macro level of the site or the macro level of your business strategy and then reverse engineer your plan to make it appropriate for what you’re trying to do.

Matthew: Okay. So, that’s kind of stage one there, and then you kind of look at the limitations. You look at the foundation. You look at utilities, all those things. What’s your optimal cultivation facility look like? You’ve started with that as your foundation. These are all the things I need to know. I have to fill in all the blanks so I know what I’m dealing with and then how do you go about creating the after photo from the before?

Matt: Once you get a lot of those parameters and once you have quantifications on a lot of those elements that we just talked about, then you kind of have your playbook. And once you have your playbook you can start to design what is the most appropriate for those different conditions. Like I said earlier, that’s all going to depend on what you’re trying to do. And because as you and as a lot of the listeners are probably familiar with, there’s many different ways to go about skinning a cat when it comes to cannabis production. Even from the methodology that you incorporate, whether that be a greenhouse, whether that’s full outdoor or a highly tuned indoor environment.

So let’s say you go with an indoor structure, you’re in an environment where that’s necessary, or even a hybrid greenhouse. What I would then encourage people to do is look at the systems that are going to be associated with that because every building type has a different set of systems that work the best for that building. So for example, the HVAC or the cooling or heating system that you may put in a greenhouse is going to be very different than the system that you would choose to go into a building. And even within that building itself, depending upon that building’s insulation values, depending upon its materials and its finishes, that could also affect those systems too.

So starting off with what that angle is, then that helps you define what that ideal facility is. Other things that I really encourage people to think about during this part of the design phase is efficiencies in resources and efficiencies in movement. Those two things are very big when you’re starting that design process, because ultimately those are two things that are very difficult to go back and change in the future. So when I say that, it’s really looking at that design and how it’s laid out to maximize the use of your employee’s time, to maximize their use of their movement around the facility as well as, like I said earlier, to look at those resources as well, your energy usage, your water usage and look if there’s ways that you can reduce that through either implementing architectural elements like regenerating power or more efficient fixtures or looking at methodologies with your local county in order to reduce that.

So a lot of times they’ll let you do off peak hours to reduce your load. They’ll potentially have incentives for certain technologies and certain equipments that you may be able to put in, but all of this is required to be done first before you build the building. Like I said earlier, it’s really difficult to go back and change those things. So in order to create that optimal cultivation facility, having a little bit of pre-thought in design goes a very long way.

Matthew: Now everybody, not everybody, but most people coming into the industry are new. Maybe some people are listening right now that are creating their own grow facility or they’re going to be soon or they’re considering applying for a license and they don’t have an architectural background or just practical growing practice. If you were to kind of stack rank the number one, two and three mistakes that people make when considering how to make a grow facility, is it that easy to put them into buckets as the most common and second most common?

Matt: Yeah. We definitely see a few general mistakes that people go through, and I would say that the biggest ones are just the transitioning of scale. A lot of people now are scaling up from what I would say the hobby scale or the light commercial scale to something that’s more industrial. And when you go and make that jump there’s a lot that’s lost in translation. So I really encourage people to look into the different more industrial equipment that can be at your disposal when you get to that larger scale, and don’t hold on to those old concepts, because those old concepts are only at the small scale. As soon as you try to replicate that at the larger scale, you’re going to be losing a lot of efficiencies and you’re also not going to be capitalizing on all of the industrial scaled materials and equipment that are at your disposal then.

In addition to that I would say another big bucket that people generally fall into is not considering what the local code and permit restrictions are. Because every single municipality has a slightly different perspective on their building codes, nevertheless how cannabis is being perceived and how cannabis is being implied to those building codes, there is almost always very specific limitations, and that can be limitations to your site. That can be limitations on how and what you can build, and those are all things you need to be considering first and foremost. I’ve seen a lot of people go down a path of action that they thought that they could accomplish only to then be delayed and cycled by the code or the inspector because they didn’t properly look at the code and the permitting restrictions prior to trying to implement that design.

Matthew: Good points. So people, they might have two or three plants and they think oh I can scale up now to hundreds and it’s as different than riding a bike and then the space shuttle. So there’s all these ideas of plant management and managing a much larger amount of inputs and outputs that just change the whole game entirely. So people struggle with that when the scale changes. I can see that. I mean in terms of plant management, when you get into much larger grows, I mean is there anything interesting happening with the technology there? I’ve heard people use flood tables. I’ve heard where people have these rolling tables and little, not assembly lines, but the way that kind of tables work together to manage everything from trimming to watering to curing and so forth. Do you see anything like that in terms of optimizing the workflow?

Matt: Yes absolutely. It first starts off with that layout. So to make sure that you’re designing something that has the proper flow to it. I think that’s just drawn from general manufacturing principles. Looking at efficiencies that happen in Japanese manufacturing and drawing some of those principles in how the management structure is laying out not only the physical flow but also the management flow of those materials. And then some of that technology that really helps with that. You mentioned a couple of those. The big ones for me are a good ERP solution or good inventory management software.

When you’re at a small scale it’s really easy for your master grower to keep track I think of a lot of these things and I would say that most people who are at a smaller scale or a smaller commercial scale are doing a lot of these things either through their head, just keeping these notes internally or they’re writing them down on paper. It’s not as organized as is necessary for when you go to that larger scale. When you’re at that larger scale, and especially in these regulated industries, all the plants have to be tagged, all the plants have to be recorded and you have to very accurately manage that as that plant goes through its lifecycle.

There’s where having a software solution that can manage that and automate some of those things, I feel it is huge and really reduces a lot of that human error and a lot of that thrown in on your upper management. In addition, I think that there’s a lot of great technology that you can utilize within the rooms to reduce your employee output, as well as, make that management of a large group of plants a lot easier. One of the things that you had mentioned that I think is great are the rolling benches, rolling agricultural benches. We definitely recommend those, whether it’s indoor/outdoor greenhouse, because it maximizes your footprint and it allows you to get more plants into a smaller space.

In addition to that I think an automated watering system. So, whether you use an ebb and flow or drip system, some sort of automated watering system that you can reduce the amount of hand watering that’s necessary is going to be huge in reducing your employee costs. Because watering represents probably one of the largest operational costs once you get to a large plant count. And then in addition it’s going to enable consistency, and when you talk about some of the pitfalls of large quantities of plant management one of the biggest ones is consistency. Consistency in the amount of water each one of those plants gets, consistency in the amount of love each one of those plants get. So, by automating some of those systems, it gives your farmers more time to actually focus on plant health and plant maintenance.

Matthew: Is it possible to have carbon neutral growing?

Matt: I absolutely believe that that’s not only possible, but that should be something that we all strive toward. One of my personal passions is sustainability in cannabis. Right now we are just energy hogs because the profit margins are so high and a lot of these efficiencies there hasn’t been a necessity to have to find those or to have to utilize those. However, I think that there’s going to be big negative media backlash that’s going to be associated with all the power we use, and I think that anything that we can do to not only stifle that is going to help the industry in general, but it’s also going to help each individual proprietor reduce their costs. So I’m a big fan of trying to utilize any sort of sustainable or green methods into the growing facility.

The biggest, and it may sound to be the easiest, is really just making sure that your operational flow is as streamlined as possible. This goes back to what we were just talking about with an appropriate layout and design. If you can design that manufacturing process to be as streamlined and as smooth as possible, then you reduce a lot of your employee waste, and that’s the biggest one that almost any business can do. You don’t have to go out there and buy any expensive technology. All you need to do is really put a lot of thought into how your employees move around and handle your materials. Let’s say somebody has to take an extra ten steps every time they perform a task and they perform that task multiple times a day, then that ten steps could extrapolate to thousands of steps by the end of the year and that is thousands of minutes of wasted time and ultimately a less efficient facility.

So that first and foremost is just how you look at your employees and your employee resources. In addition to that there’s a lot of new, exciting technology and equipment that can be utilized into these growing facilities. I think one of the most exciting ones and one of the most easy is just all the new efficient lighting fixtures that are out in the marketplace. Conventionally, up until about five years ago, we all grew with either 600 watts, 1,000 watts HPS fixtures and it was quite typical to use 1,000 watt metal highlights for your veg. Now there’s a wide range of plasma, LED, induction, (19.17 unclear), all these different fixtures that have a very comparable par and lighting spectrum but have a reduced wattage. And they’re really easy to get, they’re really easy to switch out into your facility. They usually don’t require a lot of addition infrastructure because you’re actually using a lesser load. And addition to that there’s usually incentives or rebates being offered by a lot of the local municipalities to help reduce the initial cost for that business in going and purchasing those and implementing them into their facility.

Besides that there are all sorts of different, more effective and green strategies, whether that be the poly covering on your greenhouse or different feeding systems, different HVAC systems that are more effective. Another big one is renewable energy sources. So we’re definitely seeing a big push now for wind, geothermic, as well as solar renewable energy being implemented in these facilities. And then the last concept I like to talk about is called districting, and that’s basically using your grow facility to help aid your community around you. And what we’re seeing and what we’re trying to kind of design the wave of the future is instead of a grow facility that is pushed out into the perimeters and buffered away from everyone else, they actually start to implement these into more of a community environment where you could, let’s say, purchase on large solar array that powers maybe your grow facility during certain hours when the lights are on, but it can also power let’s say some apartments or some mixed use commercial areas.

You could also then share the heat, so the heat that’s generated, the excess heat that’s generated by your light fixtures could be shuttled over to let’s say your living areas, your living buildings and then used as radiant ambient heating throughout the facility. And then this whole acts as an ecosystem, and if that can occur, then reaching carbon neutral is even easier because then you’re not just alone by yourself at the single facility, but you’re actually sharing some of your responsibilities with your neighbors around you and there’s a lot of synergies that can happen to allow that carbon neutral effort to be even easier.

Matthew: Do you use any specific intellectual property to help your clients?

Matt: Yes, I think that that’s something that we’ve been developing over years is some specific IP that we have. A lot of that is specific to the growing methodologies. We’ve definitely developed what I think is a pretty unique way of production and processing that goes back to that manufacturing streamline that we talked about earlier. So we have just developed that process as well as the equipment associated with it into our own Calyx King package, so to speak. It’s not anything that you couldn’t go out there and get yourself. It’s more how you put all these different components together I think is the IP that we offer.

Matthew: In terms of creating standard operating procedures of SOPs, where do you see amateurs fall short in terms of thinking how a cultivation facility ought to be run?

Matt: I think a lot of times it is because people are trying to capture what they’re currently doing and not trying to theorize about how it’s done better. I think when you write SOPs that gives you the prime opportunity to do so. Part of SOPs is capturing what is currently happening, but like I said I think it’s this prime opportunity to expand upon that and to make it a more ideal situation. So I would definitely encourage people when they do write those SOPs try to think about how to better that process and how to then standardize that in a way that makes it for everyone.

Matthew: What about your partners at Calyx King? What do they do?

Matt: I’m very fortunate to be partners with a very diverse group of professionals. We are comprised of some lawyers, operational managers, long time horticulturists. I run the architectural and design department in which we have two other trained architects, as well as several individuals from the construction and project management field. So, we are very fortunate to have a pretty wide spectrum of skillsets underneath our roof.

Matthew: You talked about some of the latest developments in technology for grow rooms, but what do you think the grow room of the future will look like? You mentioned districting, which is a unique idea I haven’t heard before. Is there any other vision you have about how the grow room of the future will look?

Matt: Yeah, I definitely think the grow room of the future in my perspective or what I would love to see is that carbon neutral grow room where you are using as little resources as possible, and it’s as automated as can be. So, we’re definitely seeing some very good advancements in that technology in order to accomplish that in the last, I would say, three to five years. And I really think that now it’s just the process of putting all that together and having the capital to do it right properly from the beginning. I think a lot of people getting into the industry are hamstrung and don’t have the capital that’s necessary a lot of times to perform some of these more expensive methods or purchase some of this more capital expensive equipment. But it definitely goes a long way and I think that’s the grow rooms of the future and the grow facilities of the future are becoming much more sophisticated. They’re starting with a lot more capital so they can accomplish these things. They’re not having to be revised.

They’re starting off with all the proper mechanisms at first, and they’re being able to then maximize that. So, my ideal grow room, and I’ll be a little more specific with it, my ideal grow room would be a system that is being cooled in a passive manner and heated in a passive manner. So, ideally that would be located in a geographic area where you could capitalize on geothermic loop in order to accomplish that. The grow methodology would be something that was without soil or without a soiless medium. So what my preference is is deep water culture and an organic deep water culture. So in an organic deep water culture setup you could use very little water and very little nutrients, so that reduces both of those loads.

Then this would be a facility that would be a hybrid. So you would be able to utilize the sun’s natural solar radiation. So it has a roof systems that has the ability to control its opaqueness. And then lastly, you would have an automated basically moving system so that your components are then automated on track moving through your facility. Therefore you’re reducing any sort of employee resources of having to transplant and then change those plants as they are going through that lifecycle. This is something that you see very commonly in really large agriculture with the moving bench system. So my grow room of the future you would be utilizing the very top pieces of technology from all of your different categories and seamlessly tying those together to have the most, in my opinion, efficient and effective room and production facility.

Matthew: That’s fascinating. If there’s listeners thinking about pursuing a cultivation license, what are the most important things they should do to make that happen, in your opinion?

Matt: Yeah, I think it’s going to come down to the individual state in which they reside, in which they are looking to get that license. And I say that only because all these different license processes are so different, depending on where you live. But once you actually look at that and look at what the specifics are for your local, then I would start to look at your site. I think your site is so important. I always tell people that it takes three things to really be successful in the cultivation side of things and that is you need the right IP and the right gardeners, number one. You need the right genetics and strains, number two. And then you need the right tools in order to accomplish that, number three. And your building and your site is your number one tool.

So you definitely want to put a lot of emphasis on where that is and making sure that that’s proper because if you don’t have that right tool, then you’re not going to be able to maximize your strain and your farmer is not going to be able to do his job properly.

Matthew: Matt, I like to ask a few personal development questions to let people get to know you a bit. With that, is there a book that has had a big impact on your life or your way of thinking that you would like to share with listeners?

Matt: Wow, you know, there’s a book. It may not be applicable to cannabis or to growing as some may expect, but it has been very influential in just the business management and the effectiveness for me and it’s a book called the Effective Executive. I think a lot of individual… and the reason I read this book is because what I see a lot, talking with people all over the United States who are interested in getting into this industry, it’s a lot of new business owners. It’s a lot of people starting a business for the first time or a lot of people looking to expand their business. One of the most difficult elements that I’ve seen people struggle with is just that management from general business terms and general business perspectives. The Effective Executive has been a very good book for myself to be able to tackle some of those general business ideas and to do things in a better sense and in a more effective sense as a manager of a corporation and a company.

Matthew: Yeah that’s a great suggestion. We could all use any advice there possible. Is there one thing that sticks out to you that you use often from that book?

Matt: Yes I think it is how do you properly attain your goals, and it gives some really good pointers. Especially about writing things down, creating succinct and smart business plans. Being able to isolate things, being able to not what I call chase butterflies, which I think a lot of people run into in this industry because there’s so many opportunities. But to really look at how to focus and target your efforts in what you want to do to accomplish your goals in the best way possible.

Matthew: Is there a tool, web-based or otherwise, that you consider vital to your day-to-day productivity?

Matt: There are several tools that I use that are specific to the architecture side of things that are indispensable, but may not be as applicable just for normal people getting into the industry and those are some of the more architectural programs, Auto CAD REV IT. We do a lot with Bin Modeling, which I feel has definitely revolutionized our ability to plan these facilities. Bin Modeling is building information modeling, so it’s basically in the computer in a 3D environment. You are putting in as many parameters as possible. So, we actually like to create the whole building inside the computer. We put the actual mechanical systems in there and then through certain programs and algorithms, you can run simulations on your building.

So, you can run heating simulations. You can run your light simulations to see how that affects your insulation for example or your vapor barrier. And you can really start to find any sort of bugs or hiccups in the computer before you actually build it, and we’ve found that that’s been very advantageous in saving money in the field.

Matthew: Wow, so it creates a simulation of what the live finished building would look like and how it works.

Matt: Exactly, and it really helps too with testing concepts with a lot of things. One of the major architectural elements that we have been doing a lot of advancement on in the last five years is the HVAC and the environmental condition controls because there’s so many different ways to go about it. There’s forced air, there’s chill systems, there’s VRS and they all on paper do something very similar, but they all do it in a different way. So, it’s been really helpful, especially with that to be able to model these different HVAC systems into a building to see how that influences those interior environmental controls, as well as its impact on the electricity usage of the building or you can even structurally be able to model these things. So you could model your rooftop unit and that could tell you structurally what additional supports you may need and then what the cost associated with that is. So it just allows us to flush out a lot of those design concepts before actually having to put a hammer on a nail out in the field.

Matthew: Great, great information here Matt. I appreciate that. Before we close, can you tell listeners how they can connect with you and learn more about Calyx King?

Matt: Yeah, absolutely. You can find us online at www.calyxking.com. We have a contact form there through the website. We also have the contact information for all the different partners. If you have a specific question, you can contact one of us directly, depending upon our skillset, or just through that general info tab there on the website is easiest.

Matthew: Would you mind spelling the url?

Matt: Absolutely. That’s www.calyxking.com.

Matthew: Well Matt, thanks so much for coming on the show today and educating us. We really appreciate it.

Interview with CEO of Cannabis-Infused Beverage Maker, Mirth Provisions

adam stites mirth provisions

Adam Stites knew he had to be involved in the Cannabis Industry. After talking with friends and selling his last business he dove in creating Mirth Provisions. Mirth Provisions based in Washington State makes infused beverages and a sublingual spray.

Key Takeaways:
[1:31] – Adam’s background and opening of Mirth Provisions
[6:40] – Picking cannabis-infused beverages as the main offering
[8:24] – Adam talks about the Washington cannabis market
[10:28] – Mirth Provision product descriptions
[12:47] – Adam talks about where product ideas come from
[15:33] – Adam talks about how data is used
[16:34] – Adam compares and contrasts the Washington and Oregon Markets
[21:18] – Keeping an infused beverage shelf stable
[24:39] – Innovation in in-store marketing using refrigerators
[28:19] – What do you need to get into the market
[29:29] – Pricing of Mirth’s products
[33:19] – Adam talks about the infused product market in five years
[34:45] – Adam answers some personal development questions
[41:00] – Contact details for Mirth Provisions

Important
Get your free cheat sheet, The Five Trends That Will Disrupt The Cannabis Industry here https://www.cannainsider.com/trends

Read Full Transcript

While flower continues to be the hottest cannabis item in Washington State, the infused products business is also getting traction. Here to tell us about how his company is thriving in Washington is Adam Stites, Co-Founder of Mirth Provisions. Adam, welcome to CannaInsider.

Adam: Hey, thanks Matt.

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

Adam: Sure. So, we’re actively executing a national brand expansion. We’re currently in Washington State. That was the first state that we started in, kind of proof of concept. We then expanded to Oregon and Arizona last year with our Drift Sublingual Spray, and we’re launching in California in July, which I’m proud to announce. We just signed that deal last week.

Matthew: Oh great. And how about where are you sitting exactly today? Are you in Seattle? Where are you?

Adam: I am sitting at our new Portland, Oregon facility. So maybe 45 minutes south of our Washington operation.

Matthew: Okay, great. And before we jump into everything that Mirth Provisions is doing in the Washington market and elsewhere, let’s hear some of your background and history and how you came to start this business.

Adam: Sure. So it really started in November 2012. I was with a group of friends in Austin, Texas. We happened to be watching the election results come in, and saw Initiative 502, which was the initiative to legalize marijuana in Washington State, come on TV. We started to see the returns even from the eastern part of the state that typically votes a little more conservative, and we said man this thing is going to carry. I mean they hadn’t even counted all the votes in King County, which historically has been very supportive of cannabis.

My mind just started racing, and there were some friends and maybe a few alcoholic beverages, and we started to say hey, what’s the opportunity here and when is the last time we had a $10 billion informal industry with no real brands, and what if we could do something in here that was truly different and better and to build a brand. That was kind of the genesis of the idea. When I got home to Portland I met up with two friends who had an agency here in town, (2.42 unclear), Andy and Peter, and I said, hey guys I’ve got this crazy idea. What do you think about this? We met at a coffee shop outside of their office. They were not totally comfortable discussing it in front of their team, but we kicked it off together.

We started with our own theories of what we wanted to produce in products. They helped us really introduce a quantitative and qualitative research to the market and what we thought what products would really be best. As a result of that, we arrived on beverages, kind of the intersection of where consumer desire was and where the market hadn’t adequately produced products of the quality that we thought folks would want. So, as a result of that, we decided to enter the beverage business and using some other contacts and friends that I knew was connected with a gentleman who was a former head of operations at Tazo Teas here in Portland. So, he had one Tazo’s formulation work, and then after Tazo was acquired by Starbucks, he also went on to do formulation work for Starbucks up in Seattle.

So, specifically if you’ve ever had some of Starbuck’s flavored teas, you’ve tasted some of Michael’s work. So, he was really a formative part of the initial product formulation and in getting our manufacturing plants set up. So that was the genesis.

Matthew: Okay. And how about your personal background and work career?

Adam: Yeah, by the way, I love this question because people that you run into in the industry it’s such a wide variety because really no one, unless you are growing in the medical space prior, came from the industry. So, it’s such a wide variety of backgrounds. I think I fit that mold a little bit. So, my background was in ecommerce. I founded a paintball equipment ecommerce site that we grew to become the largest retailer of paintball equipment on the internet.

Matthew: Nice.

Adam: Then we grew the business through other acquisitions, especially nichey, commerce companies, grew the business to about $10 million in revenue. And ended up selling the business in November of 2015. So, that was really my background, B2C, consumer marketing fulfillment. Yeah.

Matthew: Are you pretty skilled at paintball strategy?

Adam: Not as much as I once was. Really when I was active in the business the guys who were active always tried to get me to come out with them so that they could use me for target practice pretty much. They were a lot better than I was.

Matthew: Yeah, I’ve heard that story where some friends go out. Yeah, we went paintball and there’s one or two dudes out there that are like Rambo, and they just light everybody up and you’re done. Is that your experience? Were they using your equipment?

Adam: The sales staff had a background as tournament players, and they were quite good. I started much earlier and was much more modest in my abilities.

Matthew: It’s funny that you got into the beverage part of things, because when I moved to Boulder that was one of the first things that really sparked my interest is I saw some people around five or six in the afternoon or evening and instead of having a beer or wine, they busted out a cannabis infused beverage. And I thought wow, this is really crazy. Not only is this market segment going to really be popular, but it’s also cannibalizing alcohol, which is just a major, major seismic shift, and I couldn’t believe it. So, I think you picked the right pasture and that’s important.

Adam: You’re absolutely right. We’ve been seeing a lot of data recently come across talking about how industry analysts for the spirits industry are already starting to factor cannabis consumption into their forward projection. So, I think that says a lot, particularly when we’re seeing states that are collecting more tax revenue from cannabis than they are from alcohol. So, originally while Andy and Peter helped to refine the process and thinking about what consumers wanted, I’m glad we landed on beverage.

Initially the genesis of beverage was really my first experimentation. I was coming back from a cycling trip in central Washington. I was driving my 1983 Volkswagen Westfalia across the Cascade Pass, and if you’ve ever been in a Westie, you know those don’t exactly set land speed records. So, I had a lot of time to think, and on that drive started really thinking about the concept of a coffee product and infusing a coffee. So, as soon as I came home I grabbed my French Press, brewed up a pot, infused some cannabis that I had into a thick crème sort of base, and that was the genesis, kind of the first product. And suffice to say, when you can’t really lab test what you’re working with that initial brew was a little bit stronger than I anticipated. So, I went for a little bit of a nap that day, but it was the beginning of the concept.

Matthew: Where are we right in the Washington market holistically, if you’re looking at a 5,000 foot level?

Adam: So, at a high level we’re seeing tremendous growth in Washington. So according to BDS, and the last data we had was January 2017, sales were up 71 percent over January 2016. We’re happy to see that beverage sales were up over that, up 91 percent year-over-year. So we’re outpacing overall market growth, and I think what’s driving that Matt is people’s continuing… our expectations and our perceptions with regard to cannabis are maturing. So, two years ago when you walked in to a retailer or a dispensary you’d expect to see flower, and consumers came there to buy flower and now they’re seeing a variety of addition new novel products. They’re seeing how they can integrate this into their life.

Folks like me, my background, I was a marathon runner, a triathlete. I don’t necessarily want to smoke or vaporize cannabis. It’s just not my preferred method to enjoy the plant. So I think a lot of other folks are saying hey, I’m not going to buy a joint. I’m certainly not going to dab, but would I try an edible? Would I try a beverage? Would I try a sublingual spray that’s discreet and I can take anywhere. So, I think as people are willing to try these products, they’re saying hey this is for me. I like this and I can control the potency or my experience and that’s why I think we’re starting to see in these more niche categories, greater growth.

Matthew: Have you considered an infused paintball where you can medicate your friends and family from afar?

Adam: Whether they like it or not. I love it. I think there’s an opportunity here. We should talk.

Matthew: So, if someone’s just hearing about legal and Drift for the first time, your products, how do you introduce those? How do you summarize what they taste like, what the experience is like, what they do for you?

Adam: Sure, absolutely. So we’ll start with Legal. Legal is our line of beverages, and they’re an all natural, phenotype-specific beverage where we pair specific strain blends with natural terpenes found in fruit to create a consistent effect. So, that means whether you’re in Seattle or Scottsdale, you’re going to have the same effect of the product, because again we have a blended set of strains, which results in a certain ratio of cannabinoids in concert with the natural terpenes that we were very deliberate in the fruit that we use. Lemonine, Lemon, ginger. It’s a very calming, relaxing terpene in concert with the strain blends that we use, which are more of an (11.13 unclear), a little bit more of a heavy decarboxylation step up the CBN.

So, with all of our products we kind of began with the end in mind. What is the effect that we’re trying to achieve and how can we use natural products to achieve that effect. So, shifting over to Drift. Drift is our sublingual spray. It’s the ease of a vape pen without the smoke. It’s fast acting. You spray it underneath your tongue, and our patented formula allows you to feel the effect in just a few minutes. It’s precise. We actually ended up spending about five figures on the atomizer that it met the requirements of a volume measuring device set by the State of Washington. And what that means is each spray is 106 milligrams, so you can precisely dose yourself. There’s no guesswork involved and it’s discrete. You can take it anywhere. And the only thing that people know is that your breath tastes amazing and you probably have a little bit of a smile on your face in a couple of minutes.

Matthew: Right. I can see where you would really want that diffuser or atomizer to be precise because if you get that wrong it could be a different night than you expected.

Adam: True.

Matthew: So, how do you create products? Is it a whiteboard situation? You talked a little bit about how in Austin with your friends you were thinking about it, creating Mirth and so forth, but how do you actually arrive at something like Drift? Was there a light bulb moment, were you kind of riffing with people you know in the industry or how does that happen?

Adam: Here’s what’s kind of unique situation. I woke up one Saturday morning at my girlfriend’s house and I said we need to go to the brewing supply store, Whole Foods and a lab supply store. It kind of came to me one morning an idea to take an ethanol extracted cannabis, which was an aqueous solution. So it was suspended in an ethanol, and then be able to make a sprayable version of that. So, that was kind of the first generation of Drift that was just a random thought one morning. So, I think it’s part that random inspiration. It’s part I love going out in the field with our sales team and just visiting retailers and dispensaries.

I shut up and I let our team explain the product and it’s great to listen to our retailers and our dispensary partners. We’ve come to be very close with a lot of these retailers and they’ll tell us straight what they’re seeing in the market, what’s working. So that’s another element. Again we’ve gotten pretty sharp at using quantitative and qualitative research to give us additional feedback. We do Voice of Customer sessions on new products with folks to get feedback. So, also attend the cannabis shows, attend natural food shows. Just really exposing yourself to the broader market. I think that’s kind of the data end.

What bounds all of this thinking is really our desire to do something that’s different and better. We don’t want to be the me too guys. We don’t want to log into BDS or another analytics tool and say hey, what’s trending. Chocolate bars, we’re going to give them the chocolate bars. We just philosophically, we don’t see that we could add a lot. If we don’t see that we can add a lot of value in a specific area or with a specific product, we’ll typically stick out of it, unless we can say we can be the absolute best in the world with this product segment. Maybe we’ll look for something else.

Matthew: Okay. Interesting. You mentioned BDS and there’s some other market data companies out there that kind of aggregate the dispensary data, what’s selling and can give you some insights there. You mentioned, hey, chocolate bars are selling, we shouldn’t make chocolate bars, but a lot of people are saying hey we should or we should make gummies. Do you think there’s kind of a self-fulfilling prophecy in some of the data out there because people all kind of herd around these notions of what’s selling and then maybe they’ll say well I’ll just make a glow in the dark gummy. That will be my unique selling proposition and I’ll just get a sliver of this market? What are your thoughts around that?

Adam: You hit the nail on the head. It is you’ve got everybody who I think there is a tendency to skate to the puck, and we want to skate to where the puck is going to be. Philosophically we don’t think that the world needs yet another, as you mentioned, glow in the dark gummy worm. What we need is to say where’s the gap in the market? What is the use case for this product? How are people actually using it? Is it, hey, I’m off work, I just want to relax. Hey, I’m out with my friends and I don’t like alcohol. I want an alcohol alternative. How is it being used and how can we do something that’s really great. Our test is, is this something that we’d be proud to share with our friends and our family, from the ingredients, to the taste, to the effect. And if we don’t feel good about that, we have no business making it. So, I think if you create great product that you’re really proud of, the rest of the business has a tendency to take care of itself.

Matthew: Now when you look at the Washington and Oregon markets, how do you compare and contrast them in your mind?

Adam: So, we’ve been spending a good amount of time in Colorado and we’ve had substantive with a couple of potential partners in that state and also in Nevada. We’re looking for partners in various states to support. But I’d say that Washington is very similar to Colorado in the respect that it’s more established market. For the most part the regulators aren’t constantly changing the rules. And the kinks for the most part are worked out and that produces a more stable environment from a revenue standpoint. I think Oregon is a bit of a constantly changing regulatory environment.

There may be what, two years, behind Washington in having an adult use market. I hate to say that they’re an example of a bad regulatory environment, but if you have five months of revenue decline in a state, I mean, Oregon has not recovered from the revenue highs that it saw in the summer of 2016. I think that speaks to if regulators get too aggressive or they’re not mindful of what the effects are. This has started to affect tax revenue in the state. I suspect, and we’re seeing this as well, that the kinks are getting worked out, but Oregon is certainly a new environment and one where the constant change in regulations has produced an environment that sales have not come back to levels that we seen in 2016 and that’s especially stark when you contrast that with the sales growth that we seen in Washington and in Colorado.

Matthew: Yeah. It’s an amazing thing when the revenue is kind of their measuring stick. They’ll probably respond somewhat quickly when they see it’s going down. At least I’m thinking they will, because there’s no regulators or state politicians that really like to see that happen if they can avoid it.

Adam: And I suspect it will get figured out. Certainly the regulators are doing their job to make sure that we have a safe environment, which meets the requirements of the Cole Memo, which of course is a moving target right now with the Trump Administration and Jeff Sessions. We’re not sure what that’s going to look like in a few months. Hopefully we’ll have some greater clarity on that, but they’re doing their best to create a system that is a safe place for all of us to operate in, consumers and folks in the market and the industry. And I suspect they’ll have it solved within the next few months. We’re seeing stability start to appear back in the Oregon edible market.

Matthew: I have a theory that Trump is not going to be as bad as we’ve all feared for the cannabis industry because I think he looks at his presidency kind of like the ratings of the show the Apprentice, like his presidency is a show and he has to keep ratings up. It’s not popular among viewers to do anything nasty to this rising cannabis movement, especially when states have already voted with ballot measures. So I think there will be a moderation there. At least that’s my theory. I could be wrong on that, but I think he wants good ratings. So, we’ll see what happens. Go ahead. You have a comment there?

Adam: No, I hope you’re right. I agree if you play out all the pieces on the chess board, it doesn’t seem to be in the administration’s best interest to step in and go contrary to the will of, I guess now, 30 states and the District of Columbia, contrary to the will of those voters. Whatever they’d be prohibiting, what does that essentially look like? Do they want to create an environment where there’s not product safety? Do they want to create an environment where they’re taking tax revenue away from schools and firefighters and police and channel that money to essentially a failed state at our southern border? I don’t think the alternatives are good at all. So, I tend to agree with you Matt.

Matthew: I want to pivot back to your beverage Legal because I don’t often get an opportunity to talk with someone that’s making an infused beverage, and I want to kind of understand the nuances around that. How do you make a beverage shelf stable? I mean it’s important in an edible, but in a drink it seems even more complex to get the homogenous and shelf stable and all the different things that go in around it. Has that been a learning curve for you and what’s that been like?

Adam: Oh absolutely. I think it’s very easy to make a beverage, but it’s very difficult to make a good beverage. So, to give you an overview of our product, we have our Sparkling Pomegranate, that’s our sativa blend. We use the same three to five strains in that beverage. So, that’s an uplifting, euphoric, energetic sort of high. We have our Sparkling Rainier Cherry. It’s very much a focused, clear headed high. Our Lemon Ginger is the indica blend, which people describe as a body buzz, kind of a smooth, freeing head high. Our Cranberry CBD is a one to one ratio of THC to CBD. Our newest product is our espresso mocha, which is a cold coffee. It uses a sativa dominant hybrid, very mild uplifting, focus, great Sunday morning kind of chilling out working on the crossword, around the house, put on some jazz, that sort of vibe on the product.

So, those are the five flavors, the five effects. Kind of going back to your question, how do you prepare those and how do you make those shelf stable, obviously like any natural product, there’s a pasteurization. You have to heat the product, but the tolerances when you’re working with a natural product like we are, when you’re working with coffees, when you’re working with fruits it’s very similar to cannabis. You have the volatiles, the terpenes on fruit that can flash off early if you’re not very careful in your pasteurization process. Because we’re not introducing benzoates or other heavy duty preservatives in the product, we have to maintain and extremely clean manufacturing environment. Just the tolerances for any air in the product is much lower when you’re dealing with a natural product.

Matthew: Okay. Then, we talked a little bit about terpenes, but how about preserving those in the beverage over time? Is there any special considerations around that or things you had to discover about the terpenes in a beverage?

Adam: Sure. So, we have terpenes from two sources in our beverages. The first is from the cannabis itself, and any time that you introduce heat to the extraction or the distillation of cannabis there’s an opportunity that you’ll flash off those terpenes because their flash point, the point that they turn into the gas, is much lower than the heat necessary distill the other cannabinoids. So, that also applies to the fruit source of the terpenes. So, when you’re doing a pasteurization or you’re warming the fruit, if you aren’t mindful of the temperatures, you can flash off the terpenes, which affects not only the flavor quality of the beverage but also the functional nature of those terpenes in concert with the cannabinoids.

Matthew: Now you’re doing some innovative things with in-store marketing with refrigerators. Can you tell us a little bit about that technology you’re using there?

Adam: Sure. So, for several years we’ve had a custom wrapped refrigerators/coolers in the store.
When you come into a dispensary or a retail store, you’re going to buy a beverage, you prefer to have it cold as opposed to ambient room temperature. So, that has been a dramatic lift for us in terms of sales. We see anywhere between five to ten times the sales of those retailers who store the product in one of our refrigerated coolers. But we’re also starting to develop technology around LCD fridges. It’s pretty amazing technology where we can have an animated front cover to the fridge that describes the product, describes the effects where we integrate a lot of the videos that you can see on our website for the consumer in the store so they can learn about the product.

We’re also starting to experiment with some even more cutting edge technology on our in-store displays and coolers. Cameras that can see the consumer, can determine the age and the gender of who is standing in front of the cooler and could dynamically shift the content based on who is standing in front of it. We can log that information in terms of who is standing in front of the cooler, the actions that were taken, whether the fridge was opened. So these fridges are almost like your smartphone where they’re connected via Wi-Fi or internet back to us where we’re aggregating this data. How many times was the fridge opened, looking at the potentials of sensors or pressure pads within the fridge to augment the data that we receive from a BDS or (26.20 unclear) .io to make sure there’s always a product on the shelf and to be able to react to quicker to out of stocks, as well as just understanding who is your customer.

That is a question that I can’t really answer. I can tell you what my anecdotal experience is, but with this sort of technology integrated in the fridge, I can tell you in any zip code what day of the week, who the consumers were and for how long they interacted with one of our coolers.

Matthew: Wow, that’s amazing. I’m so glad my home refrigerator doesn’t market to me as I pass by with Drum Sticks and chocolate cake. I’d roll away down the street if that happened. Okay, wow, that is really cool. That’s amazing. So do you take that data to dispensaries that don’t have a cooler and say, hey look what can happen if we put a cooler in here?

Adam: Absolutely we do with our base coolers. The cool thing is when you’re in 400 stores you can do trials of different sorts of point of sale, and with the access to real-time data that we have with some of the analytics providers, can very quickly ascertain the effect of any change in point of sale. And once we have a demonstrated proof of concept we can scale that out across the network of stores that we sell in.

Matthew: Do you think it’s prohibitively difficult for new small entrants to get into the infused products business if they don’t have capital or haven’t raised capital, I mean? You’re a smart guy with a background in a lot of different skills in marketing. Can you really just come in with a good product and make a dent or has there got to be a lot of different skills brought to the table, besides capital; marketing, formulation, creating brand equity and so forth?

Adam: So, I think if you’re going to go into a highly competitive, developed, large segment of the market, you probably need to have capital. You need to have a team to the extent that you have a product that’s truly different and better, that makes it easier, but then you have another challenge, which is communicating to the market why it’s different and better, which is kind of the space that we fell into. People come to a dispensary, they expect to see flower or they expect to see a vape pen. The other products are kind of new to the consumer and then onerous is on us, as the brand owner and the manufacturer, to communicate the benefit, why it’s different and better.

So, really to the extent that you’re producing something that is different and better, I don’t think you have to rely so much on scale of operations and being the low cost producer and spending the most on marketing, than if you in a larger but more competitive product segment.

Matthew: Okay. Now, we haven’t gone over pricing. How much does Legal the drink and Drift the sublingual spray cost?

Adam: So, in Washington a 10mg Legal we price it to retail between $4 to $6 a bottle. So, we really want the brand to be accessible to consumers who haven’t tried it yet. We’ve seen in stores some of the data show a consistent growth in units per sale. So, we believe what’s driving that are consumers who are okay hey, I’ll try this. If I have a good experience, I’m going to come back and buy a few more. So, that’s our 10mg product. In Washington we sell up to 100mg product. In Oregon it goes up to 50mg product. So the price does increase as the potency does. Our Drift sublingual spray, I would say an average retail is between $30 to $40 in Washington State. That’s a 100mg product, 1.6mg per spray. And it comes in our Wind River Mint, which is our sativa, our Cinnamon Springs which is our hybrid, and our Lemon Chamomile, which is our indica blend.

Matthew: Those sound like great flavors, really do. How do you arrive at the cost a product should be and how do you position that with dispensaries then so everybody is making money and everybody along the food chain is happy? Is that a difficult thing? You’re sourcing your materials and your inputs and you want to make a profit, you want the dispensary to make a profit, but you want the price point to be attractive to the end consumer. So, what are your thoughts around that?

Adam: Sure. So, we know we have to live within some bounds of reality in what a consumer will spend in a given market. So, we think our product is substantially different and better. Again, thinking about Legal, the fact that it’s all natural, the fact that it is phenotype strain specific, that we’re really deliberate in terms of the fruit that we use to create an experience. That’s a much different total experience than hey it’s X mg of THC with red dye #40 and root beer flavor.

So, we think that that product can command a premium price versus that theoretical root beer product. That being said, we can’t be so dramatically higher that the consumer says hey, I see the value, but I’m not willing to pay twice as much as an example. So, we kind of began, what is it, IKEA begins with the price and works backwards. So we recognize that there’s a range in pricing that we can be at. We have different products that are at different price points and we try to be in the competitive range of pricing but never the low price leader. We really try to differentiate as opposed to one price. We differentiate on our ingredients and ultimately on the effect and the experience that the customer has.

Matthew: Yeah, you know, it’s never a good idea to compete on price. It’s like a race to the bottom then because there always seems to be some market participant that says, well I’ll lose money for my first six months. It’s like their strategy to get in and there’s always those ankle biters that are going to do that. So if you compete on price, you may be competing with someone that’s willing to take a loss as part of their strategy and that stinks.

Adam: Yeah.

Matthew: High level question here. What do you think the market for an infused product is, specifically in the Pacific Northwest, I mean you’re expanding, but that’s where you’ve started? What do you think it will look like five years from now?

Adam: I think we’ll see the continued decline of flower. And I think you’re going to see people gravitate to specific brands. I think right now no one has their brand of product that’s their go-to brand in the same way that maybe there’s a certain vineyard that you really like or there’s a certain type of beer, that you know, I’m a (33.49 unclear) guy. I don’t think folks have self-identified to brands yet, but I think that’s going to happen in the next few years. And for us that’s really the opportunity where we like the opportunity for people to try our product and say hey, Legal is my go-to, I love that Cranberry CBD. So, I think what we’re going to see in a larger sense in the market is continued development of unique and novel products, and I think that’s a positive. I think to the extent that people get away from the only view of cannabis is rolling a joint. It removes some of the stigma and I think that’s a positive thing for our industry.

Matthew: Adam, I like to ask a few personal development questions to help listeners get to know you a bit. With that, is there a book that has had a big impact on your life or way of thinking that you would like to share?

Adam: Sure. So, probably what stands out the most is a book called Blue Ocean Strategy. And the idea behind Blue Ocean Strategy is you don’t compete in red oceans of blood, which are based on competition and at a lowest price. And it essentially says, create something that’s different and better, that doesn’t directly compete with anyone else in the market. And so philosophically I think that sits well with us, and we don’t think the world needs another me too product. The world needs creative people who are making products that are different and better.

Matthew: Right, if there’s a Coke and a Pepsi, be Dr. Pepper.

Adam: Sure or become (35.37 unclear).

Matthew: Yeah right, right. Good points. Is there a tool, web-based or physical, that you consider vital to your day-to-day productivity?

Adam: You know, I think probably going back to a book. I read this ten years ago and I still use the principles. It’s Getting Things Done, by David Allen. It’s very tactical, but I’m still using what I’ve learned in that book. Also a big fan of Sandbox for email management, reminders, follow-ups, that sort of thing. It could be a bear if it’s not managed.

Matthew: Yeah, so what does Sandbox do for you?

Adam: So, Sandbox essentially can keep track of emails that you’ve sent that people haven’t responded to. You can BCC a reminder and say Friday at Sandbox.com and it will send you an email Friday morning asking you to follow-up on something. It will automatically sort your email into things that are not a priority. You can do a separate box. It doesn’t distract you with promotional emails. It will segment that and separate them.

Matthew: Very cool. And Getting Things Done, I read that book a few years ago and enjoyed it too. And the one thing I keep top of my mind is open loops where I don’t want to… open loops is this concept that there’s this background chatter of decisions we have to make like what’s for dinner. Do I have to get my oil changed next week? How about this or that? All these different things that we have to take some action on at some point and trying to close open loops so our mind has more bandwidth, because as much that doesn’t seem like those are important things, our mind is still kind of thinking about them in some way and there’s this churning going on. Is there anything else from Getting Things Done that you use day-to-day as your most important go-to tools?

Adam: Yeah and in the concept that you just described. I think it’s described as mind-like water in Getting Things Done, which is to the extent that you can take all these things that are floating around in your head and put them on a list. You pull them out of your head, which means your head is then available to be totally present and work on things that matter, as opposed to worrying about what you’ve forgotten. So, I agree there’s some general philosophy and that’s solid. Other elements that I like do it, drop it, delegate it. If you can do it in under two minutes, do it. Drop it, which is throw it away, don’t deal with it, or delegate it to someone else and ultimately defer it. So if it’s a project that you do have to do, calendaring it or tracking it somehow to make sure that it gets done. It’s a healthy way to deal with when you’re looking at a big inbox or a bunch of emails.

Matthew: So, then you use Sandbox to say email me about this in 30 days and then it’s out of your mind.

Adam: They number one way I use Sandbox, and this happens all the time, you’re working with someone on a project and they have a deliverable in a couple of days or next week. Hey Adam, I’ll get back to you on Thursday. So I’ll just CC that or BCC it to Friday at Sandbox.com with a little not to myself, have I heard back from Robert, and if I haven’t, I ping him. I follow up. Everyone else on our team is using it. It gives the impression that we’re on the ball over here and I guess we are, but the software certainly does a lot of heavy lifting.

Matthew: Now you raised some capital at the ArcView Group. Can you tell us about your experience there?

Adam: Sure, yeah. So, at RT we oversubscribed in November 2016 and even after we raised the round, I went to the next few ArcViews just because the folks that you meet there and the connections you have and the relationships you build are so valuable. I really like the format. I like the folks who are involved, and it’s something that I’m going to continue to attend, even though we’re not actively raising a round right now. We are looking for partners in various states to have the exclusive on our product where they become our licensee or our specific bottler in that state. So it’s just been a great environment to meet with our current investors and then also speak to folks who are prospective licensees or partners in other states.

Matthew: Do you want to throw out which states you’re looking for partners?

Adam: Sure. Again any of those 30 states that have a legal adult use or recreational program are potential licensing partner plus the District of Colombia. I guess, I think D.C. is a little behind, but most notably right now Colorado, Nevada, Massachusetts, really any other state that has a current medical program in place.

Matthew: Okay. Before we close, can you tell listeners how they can find Mirth Provisions and pick up some products or find you online?

Adam: Sure, yeah, www.mirthprovisions.com, and my RTH provisions.com.

Matthew: Awesome. Well Adam thanks so much for coming on the show today and educating us. We really appreciate it and good luck to you and with Provisions.

Adam: Hey, thanks a bunch Matt.


The Royalty Investing Model is Heating Up in The Cannabis Industry

marc lustig cannaroyalty

Marc Lustig CEO of CannaRoyalty joins the show today. While other industries have benefited from royal investments this is something new to the cannabis space. Listen in as Marc details the benefits of royalty investments for both investors and entrepreneurs.

Learn more at
http://cannaroyalty.com/

Key Takeaways:
[1:16] – What is CannaRoyalty
[2:05] – Marc’s background
[4:07] – Royalty investing and how CannaRoyaly fits in the investing landscape
[7:08] – Marc talks about the timing of CannaRoyalty
[8:52] – Timing on big investments in the cannabis space
[10:16] – What do entrepreneurs get from a royalty operation
[11:59] – Marc talks about his investments
[15:29] – Marc discusses managing investor expectations
[18:35] – Do current policies make investors nervous
[20:54] – Marc talks about how much capital they deploy
[24:59] – Marc talks about characteristics of a strong brand
[26:02] – Marc answers some personal development questions
[31:54] – Contact details for CannaRoyalty

Important Update: What are the five trends that will disrupt the cannabis market in the next five years?Find out with your free guide at https://www.cannainsider.com/trends

Read Full Transcript

Matthew: Hi. I’m Matthew Kind. Every Monday look for a fresh new episode where I will take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at www(dot)cannainsider(dot)com. That’s www(dot)cannainsider(dot)com. Now here’s your program.

Cannabis is getting sophisticated in borrowing the playbook from other industries such as mining and oil to create licensing revenue streams for investors. Here to tell us about it is Marc Lustig of CannaRoyalty. Marc, welcome to CannaInsider.

Marc: Thanks for having me Matt.

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

Marc: I’m in Vancouver today. That’s where my home is, but it’s also convenient given all the assets that we as CannaRoyalty own, that are either in Canada along the west coach or in the pacific west coast of the United States.

Matthew: Yeah it’s a good thing to be up there. If you’re down there, down in the states, you’re a semi outlaw. You don’t know what’s going to happen. It’s a roll of the dice to be in the cannabis business still. So I think you’ve picked a safe harbor.

Marc: True enough.

Matthew: So what is CannaRoyalty, for people who are unfamiliar with this type of investing vehicle?

Marc: CannaRoyalty is a company focused on aggregating strategic assets in the cannabis sector, which looks to create royalty structured returns for its shareholders. A royalty is like a hybrid of equity and debt where the royalty holder is paid a percentage of the sales or income of the investee company.

Matthew: Okay. So, I’m familiar with royalty, just not in the royalties, just not in the cannabis space. I’m a big fan and believer of some of the precious metals royalty companies like Franco Nevada and Silver Wheaton and been following them for a while. So, this is kind of taking playbook from another industry and applying it to the cannabis business so I’m anxious to unpack that, but before we do, can you give us a little bit of a background on yourself, both personally and professionally, and how you got into this business?

Marc: Sure. So I have graduate degrees in business and science, both from McGill University. I spent the first part of my career in the pharmaceutical industry at Merck. The next 12 years I worked in capital markets in North America and Europe. I was always focused in some way on healthcare and life science companies. In 2014, with the passing of federal medical cannabis legislation in Canada, I founded a private company called Cannabis Royalties and Holdings Corp, because I saw an opportunity to create something different than the standard Canadian license producer model that a lot of your subscribers would be familiar with.

So my thesis was that cannabis is a healthier alternative as a recreational product than alcohol or tobacco. So it can compete head-to-head with those types of products in that market, but the real upside to me and over and over that, which is already very attractive, is the unlimited upside that I see that can come from cannabis as the plant, which has never really had a chance to be researched or have had a chance to have modern, technological research applied to it. So when you start talking about the therapeutic advances of cannabis what’s where to me you see a lot more upsides. So the combined opportunity was really what drove me to found Cannabis Royalties and Holdings Corp.

Matthew: So before I mentioned how the precious metals industry and even the oil industry does some royalty operations. Can you explain and give some context on royalty investing in terms of how they do it and then talk a little bit in terms of how exactly CannaRoyalty is in the royalty space? Kind of compare the two but also get a context and a background.

Marc: Absolutely, and I think it’s the right context to provide, and by the way CannaRoyalty previously the private company being Cannabis Royalties and Holdings Corp was very much structured off of Franco Nevada. And so it works the same way in the mining or energy sector as it’s been working in the cannabis sector, although there are some differences obviously. For the company receiving the financing as a royalty it’s non-dilutive equity, and usually doesn’t have the same encumbrance that a debt would. For that same mining company or energy company, which is producing, let’s say, an ounce of gold or a barrel of oil, part of the sale of that product in the future is paid out to the investor in the form of a royalty.

So instead of that underlying company paying a dividend to its equity holders or paying an interest rate to its debt holders. The form or payback to the royalty investor is a slice of the sales or net income of the underlying company. The key variables are the same for all of these examples, which is what is the underlying health and reliability of the underlying business? What is the royalty rate itself? What is the term? So for how long is this royalty transaction going to play out? It can be a very short term or it can be in perpetuity. And what is the security that underpins the actual royalty should things not go as planned?

So from all of those perspectives, it’s identical investing in the cannabis sector as it would be investing in metals or energy-based royalties. The key difference would be really just a function of the period of time that we’re in. Mining and energy businesses are very well-known and have been being invested in for hundreds of years. Cannabis, not so much. So the fact that people are still reluctant to invest in cannabis for a variety of the different stigmas that we’re all aware of or because of the fragmented legal paradigms that exist between even Canada or the United States or other jurisdictions, there’s not a usual flow of capital that you would typically see from investors into the underlying companies, and that’s actually where CannaRoyalty has benefitted and played, I think, a very important role.

Matthew: And why is now the right time? I don’t recall coming across any other cannabis royalty firms or investment vehicles. Why did you feel now was the time to take the plunge?

Marc: Well, I mean, it’s really been two years. So it was first started in late 2014, but it’s still the same point, which is that to me it’s absolutely ideal. The timing is perfect because on one hand you have all of this growth and innovation of completely new products and new markets, but on the other hand, as I was sort of mentioning earlier, that access to capital has been constrained by the realities of the cannabis sector, whether that’s legally or because of stigmas that exist. So you have a thirst on behalf of entrepreneurs to access capital, but you have an unusual situation where that capital, either because banks won’t lend to the sector or because unless maybe you’re a Canadian licensed producer and you’re public, in which case you can’t access capital, the rest of the companies that are really just starting out or that are new or may just not have the experience in terms of raising capital are finding it difficult and that’s the gap that CannaRoyalty is looking to fill.

Matthew: Marc, is now the time to make really big investments in the cannabis space before the dust settles? I think there’s a lot of investors or potential investors listening that are thinking hey, I want to kind of wait until there’s more public companies where I can get more competitive analysis and real good information. All the ducks have to be in a row for some investors, but there is a certain amount of opportunity in an opaque market. Would you agree with that?

Marc: I mean, I believe it’s absolutely ideal. You know it’s the classic risk reward paradigm. But I believe because of the growth and progress in this sector has really just started, that you’re able to reduce that risk at the moment without commensurately reducing the return profile. So actually the opacity of the market is also helping a company like CannaRoyalty. I like to think that we give investors access to deals that they wouldn’t have a chance to gain access to on their own. And so from the perspective that these opportunities exist and they need capital yesterday and we’re there to provide what I think is an elegant structure in a non-diluted way to the end entrepreneur, it really gives our investors that exposure to a diversity of assets in a structure that I think is smart and also provides a lot of upside.

Matthew: And so for the entrepreneurs out there listening, what is the benefit to them in a royalty model? Why would they be interested in working with CannaRoyalty or another royalty operation? What do they get?

Marc: I think it’s a couple things. First of all, at a very basic level a royalty is non-dilutive to equity. And so if you’re really starting a business and you need capital badly, a lot people who are entrepreneurs end up regretting that they sold off so much of their company at such a low valuation only to see it flourish and them not own nearly enough of it as they would have like to. There’s also the aspect that debt carries with it, especially bank owned debt, would carry with it a lot of conveyance and a lot of restrictions that could limit their business.

So a royalty I think sits as a very nice alternative to both of those aspects. Over and above that, now I will talk sort of specifically about CannaRoyalty. I think that our model and our effort to be a partner with our investee company has played out very well. So not only are we providing a royalty financing but I think we’re providing a lot of other strategic advantages to our investee companies. We have every interest in making sure that our partners succeed. And to the extent that our platform gets bigger, we’re able to provide our partners with access to new markets or to other professional services perhaps where they wouldn’t have had access to those without us. So I think that the royalty model, especially from CannaRoyalty, provides an entrepreneur with a lot of flexibility and a lot of support.

Matthew: Can you tell us a little bit about some of the investments you’ve made today?

Marc: Sure, I mean, in a short interview it’s tough to sort of pick a few. I would summarize it by saying that we own parts of companies doing medical research in Canada such as (12.12 unclear), which is focused on the treatment of concussions using cannabis therapy. We own a part of a company in Canada called Anandia [ph], which is a leader in the area of genetics lab and testing expertise. We own real estate and infrastructure in Washington. We have a royalty on a processing and extraction facility in Oregon. We own a big cartridge company in California that’s doing exceptionally well. We currently have five of our own fully owned cannabis brands in the area of edibles, skin care line, animal health and various vaporization formulations that are our own proprietary brands.

We’re also in the process of closing a large investment into a leading distribution company in the state of California what we’re very excited by. I mean, in summary, we have 24 separate and unique investments. I would actually see this growing to more than 30 by the end of the year. In total we dot the map of Canada, the United States, Puerto Rico and I see us doing deals in Europe and Australia as well in addition to other states, particularly in the northeast like Massachusetts and Maryland are the areas that I see us adding deals to.

Matthew: Okay. And what’s the typical or average size of the investments?

Marc: The minimum investment that we’ve made of that 24 would be somewhere in the order of a half a million dollars. The largest would be about $5 million, exactly $5 million to date. The size of the investment is growing as we’ve grown. There are opportunities that we’re looking at now that are in the double digit million dollar investment range. And so I would say that the investment size is growing. There’s not a particular number that won’t work. Obviously it can’t be too small anymore because it won’t really have the impact that I think the platform now needs to keep growing, but generally let’s call it between a million and $5 million.

Matthew: Okay. And so, you mentioned the U.S. and Canada. Are they equally divided in terms of investments or are you a little bit heavier in Canada at the moment?

Marc: No. We’re probably heavier in the United States, at least by a number of assets. We are in the process of adding a fairly significant Canadian asset to that mix. Like I said, we’re also looking in some new states to add some U.S. assets, and in addition to that, I would expect by yearend to have other deals done, certainly one in particular in western Europe.

Matthew: Now let’s switch gears a little bit to investor expectations. How do you manage the expectations of investors in terms of the returns they can expect and anything else that they might expect?

Marc: Well I think a big part of it is first of all pointing out that we’re a public company. So in Canada we’re listed on the CSC under the ticker of CRZ. In the U.S. we’re listed on the OTC market under the ticker CNNRF. With being a public company we obviously have a number of disclosure obligations. And so financial reporting and compliance is a major part of that. In addition to that, I mean, our website I think is an excellent source of information for our investors specifically. Our business plan is dynamic in the sense that if we currently have 24 deals and we’re moving up to 30 deals, that can generate a fair amount of opportunity to communicate with our investors as to how those deals are doing or obviously the closing of any new transactions.

I think as a result of that, people either have or are going to start to get a pretty good feel for first of all, how we’re generating results or revenues or income. And then in addition, how they can think about what the return profile may look like from various of our investments or developments in our underlying assets.

Matthew: Now how does that work when you make an investment in a company that is in a state that’s not that friendly to out of staters like a Washington comes to mind?

Marc: That’s a good question. I mean I would point out first and foremost, the very highest criteria priority, from a criteria perspective, is compliance. So if there’s a state that we can’t invest in because of what you’re talking about, residency for example, then we don’t. Clearly that’s the end of that discussion. In Washington, the way that we structured our royalty transaction is that we actually finance the acquisition of property and equipment for a tenant who is the license holder, who is a Washington resident. And then in that sense our royalty structure looks and feels very much like a rate, as a way to work within the Washington legislation.

As you’re well aware, different states have different paradigms and so I think one of the advantages of CannaRoyalty has been to figure out in which states we can invest and then within that, which structures we can invest in compliantly.

Matthew: What does the current federal policy do to the risk in your business? I’m thinking particular in the United States. I mean, are you getting questions around Jeff Sessions being the Attorney General in the U.S. and does that make investors jittery at all? What’s your sense there?

Marc: Well absolutely current U.S. federal policy or whatever that is going to look like could present a risk to some of our U.S. assets. There’s no other way to say that. I mean, to be clear, we’re only invested in businesses today where state legislation supports the cannabis sector. We go a step further than that, which is that we don’t directly grow or distribute cannabis ourselves, so we don’t own any licenses directly.

We’re providing elegant financing solutions to companies that have IP or brands or different solutions for the cannabis sector. So we, as I said, focus on the compliance within the state and within the structure. Our hope is that either because of significant job growth or the obvious tax revenues or the economic stimulation that the cannabis sector is providing , in addition to the strong public support that you see across the United States, that there will be positive unification of federal policy with the state policy. I mean, even Jeff Sessions, a lot of the things that we think that he’s pointing out as being concerns, we share those concerns, whether it has to do with the transportation of cannabis across borders or whether it has to be getting higher restrictions around the young people who shouldn’t be taking cannabis, restricting the access to young people having access to cannabis.

I mean a lot of those things make very good sense. So our hope is that the federal policy aligns with the state policy and preserves the right of the state legislation to conduct its cannabis policy. I mean, clearly in other jurisdiction, such as Canada or Europe, where we’re particularly seeing a lot of opportunity, the federal policy supports the cannabis sector. So the risk there is minimal.

Matthew: And how much capital are you going to deploy? In other words, when do you stop investing? I mean as more capital comes in, do you find new opportunities, or how do you think about that?

Marc: I mean, we’re seeing more opportunities today than ever in the two and a half years that we’ve been CannaRoyalty. The opportunities today are more exceptional than we’ve seen. We have a number of different sources of capital to be able to provide bigger and bigger deals, whether that’s either internal funding or external. I mean, to date we’ve invested approximately $30 million. We’ve raised approximately $45 million to date. So we have ample capital to go and execute a number of new deals, which is obviously what we’ll be doing.

I mean it would be easy to stop investing and sit back and collect all the various streams of return from the investments that we’ve made to date and wind things up, except our view is that we’re taking advantage of a unique period of time in the sector right now where the growth and innovation is rampant. And we have a model that I think supplies the capital in a way that gives our investors exceptional return potential at a time, as I mentioned earlier in this discussion, other investors, whether they’re equity investors or debt investors just haven’t gotten around yet to being there. So we look at it very much like a land grab, if you will, where we can put these assets together still at very good valuations and eventually that will end. The market will become more competitive, certainly when federal legislation does change and you do see pharmaceutical companies or tobacco companies or alcohol and spirits companies coming into this sector. It will make the competition for the assets that we’re currently aggregating much higher.

It will make the asset values a lot more expensive, and that may be the time where we would be in a position to debate whether we should continue or not, but for the time being we see this as a really open field with a great model, and again being able to provide our investors with a lot of exposure to deals that they just wouldn’t be able to get access to on their own.

Matthew: Do you think as more competition comes in and the spirits companies, tobacco companies, pharmaceutical companies come into the picture and they have obviously access to capital, do you think you would find yourself becoming less generalist and more focused maybe on a couple different verticals within the cannabis space, instead of being across such a broad spectrum?

Marc: Absolutely. I mean, at that time I think our company would create a very nice solution for any of those larger companies. Having said that, our focus is very disciplined. I mean if you were to really synthesize down the types of investments that we have in our portfolio today, it would really come down to research, IP, intellectual property brands and delivery devices would be the areas that we’re most focused on. So we don’t and have not yet invested in any broad based cultivation play. We’ve stayed away from some of the more general aspects of the cannabis sector that we think are at risk of commoditization. And I think our focus will only continue to get refined in the areas of brands and devices and things that can sustain and increase their value as more product development and innovation happens within the sector.

Matthew: You mentioned brands there. What do you think the characteristics are of a strong brand that has enduring brand equity?

Marc: Well first of all, I think that it’s protection in the sense that it can’t be copied or made easily by anybody else is probably the highest end of that spectrum. Beyond that it really has to do with the impact at the customer level or patient level, whatever the case may be. And all of our products, we’re most focused on quality and effectiveness. And so to the extent that we’re able to provide that for our customers or the patients, we think that that’s the most enduring quality behind brand equity.

Matthew: Yeah, building the protective moat, as Warren Buffet likes to say.

Marc: Exactly right.

Matthew: Okay. So Marc this is a time when I like to transition to some personal development questions to give listeners a sense of who you are. With that, is there a book that has had a big impact on your life or your way of thinking that you would like to share?

Marc: Sure, I mean, I’m very big into climbing, mountain climbing. I’ve climbed some of the bigger mountains in the world, whether it’s in Africa or Asia. Later this year I’ll be climbing in South America. So particularly books about climbing, especially Everest, which I have not climbed and probably won’t get around to in this lifetime, but particularly books around Everest and probably the significant thing The Assent on Everest by John Hunt, have been the greatest diversions for me from a very busy business and personal life, but also very strong inspirations for one of the things I really like to do.

Matthew: Is there a tool, web-based or otherwise, that you consider vital to your day-to-day productivity?

Marc: I’m pretty old school. I can imagine that a lot of the people that you interview would have a really sexy app on their phone or computer or something. I hand write a list every morning of all the different ideas and action items that I need to follow through on every day. What doesn’t get done on one day starts the list for the next day. I’ve become sort of paranoid about leaving things undone on that list. So unless I get them crossed off, it’s a good way for me to start a new day to make sure that things get followed through on. So I would say that’s probably my greatest tool for my own personal productivity, but again it’s in the dark ages, but I’m comfortable with it.

Matthew: You know, there’s something to be said for the tactile sensation of a physical list where you don’t have to turn on the glowing blue screen to get the answer. So I can understand that, and there’s satisfaction in crossing it off.

Marc: Yeah, that’s right.

Matthew: One last question. You being a Canadian, do you find the only difference between Americans and Canadians is that Canadians are just a little bit friendlier? Remember we’ve got a lot of potential investors listening.

Marc: That has not been my experience. I think that North Americans generally are very friendly. I just spent a week in Europe where I can’t really say that was the case where I was in Europe. I happened to be in Germany, and I just think North Americans generally are very friendly. I lived in Europe for four years, in London, where certainly the European perspective is that there’s a significant difference between Canadians and Americans, but myself being Canadian, but having a lot to do and basically spending half of my time, if not more, in the United States.

I’ve got so many friends and so many people that I really enjoy and like who are American that I’ve sort of seen through any of those perceptions that there is a difference. I look at it as one large convent, and generally I’ve been lucky because I think everyone’s been quite friendly on both sides of the border.

Matthew: That’s good. That was a great answer. We should put that in a political case study for how you conflated those two together to appeal to your investors.

Marc: And if we’re speaking offline, I know a lot of assholes in Canada. So I don’t really see it the same way.

Matthew: One thing, my cousin fishes with a lot of Canadians, and back when cannabis was illegal, he did comment that he said, it’s cheap for us to buy beer, but in Canada it’s cheaper for them to buy pot and it’s expensive for them to buy beer. I though oh, that’s kind of interesting.

Marc: BC Bud, which I’m sure you’re well aware of, has been as prevalent here in Canada as (30.19 unclear), which are the two large beer companies, like Canadian fixtures. But BC Bud, if it weren’t for the fact it was illegal, it would have been just as prominent as either of those two brands.

Matthew: Now, one last question before we close. Do you know what the national sport of Canada is?

Marc: Since you ask and because of how you asked it, I’m going to guess that it’s not the normal ice hockey, which would be the easy answer. I’m going to guess it’s Lacrosse.

Matthew: Oh, he’s right. That was good. I was hoping to trick you there. I thought you might go for that… what’s that game where you push the large thing across ice. What’s that called, where they roll the huge thing and then they have a little duster in front of it and it’s going on the ice.

Marc: Curling.

Matthew: Curling, I thought you might say curling, but you got it right. It’s lacrosse.

Marc: Our roots are based in native as anywhere else. Really it’s all about native settlers and lacrosse was the game of choice. It’s not that much of a stretch. I don’t even know, as a separate topic, whether you call curling a game. If someone does, I would like to understand how they justify that sport I should say, but anyways, glad I got that one.

Matthew: Yeah. Good. Well, as we close, can you tell listeners the best way to learn more about CannaRoyalty?

Marc: Absolutely. As I’ve mentioned, I think our website is extremely informative and dynamic, and being updated regularly, especially for a company that’s generating as many different new developments as we are. So that website is www.cannaroyalty.com. There is a way for anyone who visits that website to be added to our corporate investor relations distribution list, which I would say would probably be the starting point for anyone who is looking for more information about CannaRoyalty. Once you’re on that list, like I said, you can expect as a shareholder to get fairly consistent updates. I mean we generate a lot of developments that I think keep the investor or prospective investor or even interested cannabis enthusiasts in the loop on different things that we’re working on.

Matthew: Great. Well Marc, thanks so much for coming on the show and introducing us to this topic of royalty investing. It’s really something of interest to me, and I think this sector is only going to grow as the whole industry grows. So good luck to you.

Marc: My pleasure Matt. Thanks a lot of having me and congratulations on your show. I can tell you I get a lot of cannabis related media or reporting for different types of services, and I think yours is at the top of the list.

Matthew: Alright, can’t hear that enough. Thanks Marc.