RJ: Hey everybody, it's your host RJ and welcome to Hash it Out. The Biden Administration seems to have doubled down on its decision to lay off a number of White House staffers after finding out about previous cannabis use despite the fact that the White House indicated that prior cannabis use wouldn't be an automatic disqualification for federal employment. In this episode I'll be talking to Gary Santo about his thoughts on the decision, the evolution they see toward traditional consumer packaged goods in the cannabis market and more. Without further ado let's Hash it Out. Everybody, my guest today is the president of TILT Holdings, welcome to the show Gary Santo. How's it going man?
Gary: Going well, going well. Thanks for having me.
RJ: Good. Hey, it's nice to see you virtually. Where are you joining us virtually from today?
Gary: So I'm out of our corporate headquarters today which is in Arizona and it's one of three days that has clouds in it I guess that the state allows. So it's still nice and warm though, I hail from Massachusetts originally so I'm not going to argue with this weather.
RJ: You got to meet that quota every now and again. Yeah, same thing here in Southern California, gray and overcast lately but again coming from Michigan, so we're kind of in that same sort of region, I have no complaints. I'll take a few cloudy days over lake effect snow any day of the week. I had two decades worth of that and I think I had my fill, yeah I think I had my fill. Well, I'm glad to see that you are doing well man. Thanks again for joining us, thanks for joining me. I'm stoked to ask you about of course the work you have going on over at TILT Holdings as well as this trending news topic that just happened recently regarding some White House staffers and some new developments just came out even more recently regarding at a press conference between the White House Press Secretary Jen Psaki sort of answering more questions about that. So stoked to get your perspective on that as much as you can provide but first foremost for those who may not be familiar can you just tell me more about TILT Holdings and what exactly the company specializes in? I understand that you cater primarily towards the cannabis industry.
Gary: Yes. So we are a multi-state operator but we're a little bit different from most of the multi-state operators that you hear about in the cannabis industry and we have two specific business lines one touches the plant one does not. So our Jupiter research department, that's really vaporization and inhalation technology. So it's the battery packs. It's the empty cartridges and it's really a lot of the R&D and innovation. So you think about the different categories of vaping that are out there, we specialize in the CCELL branded products. In fact our CEO and founder of Jupiter, Mark Scatterday, worked with the factory that owns the CCELL patent. To really bring that CCELL technology out of nicotine, out of tobacco and bring it into the Cannabis space. So we've been at the forefront since day one. One of the largest vape suppliers out there. I think we have about 40 50 percent market share of the CCELL market which translates to about 25-30 percent of the overall vaping market. So it's great business doesn't really touch the plant but it allows us to work with about 700 brands and that includes MSO’s that includes the Canadian LP’s and then of course just stand alone brands like your Heavy Hitters, Her Highness things like that. So it's a really great business model and very efficient. If there's any flaw it's that we don't really own the manufacturing piece, so we work with a third party. So it's important to point that out because we think to the other part of our business which is plant touching. We look at it a little differently, we're not trying to compete with the MSO’s and the LPS out there. In fact, we're trying to help them compete by bringing brands to them. So we have plant touching operations in Massachusetts and Pennsylvania and now in Ohio where we have Manufacturing in Ohio, cultivation and Manufacturing in Pennsylvania and then we're fully vertical integrated in Massachusetts where we even have retail mostly because you have to. But we built a very robust wholesale business wholesale distribution. So Pennsylvania, for example, we sell into 90 95 % of the retail stores. Massachusetts were selling into North of 50% of the retail stores on top of filling our own shelves and in Ohio we touch all the 52 dispensaries in some capacity. So for us when we looked at that Jupiter model and said, how do you get that nice tight efficient model where we're not spending a lot on SGNA. We don't have this overblown sales structure. We're not building out brands, we're working with brands to really give them the supplies they need. It made sense to us to sort of do something similar with plant touching. So for us we're looking to be a partner with brands who want to come specifically from the West Coast, they want to come east, there options are limited. I mean, they could either sell themselves to an MSO and then you've lost the brand, you can partner with an MSO but typically in these limited license markets they're going to ask for an exclusive. So Massachusetts is a great example, you can come into Massachusetts partner with an MSO and you get a total of three stores that will be distributed in. So for us we're not looking to buy brands, we just want to partner with them, not contract manufacturing per se because a lot of this CPG world is going to be evolving and when I know we'll talk a little more about that but you're going to need a partner not just somebody who you hand a recipe to pay and they pay a fee and off you go and do something. Somebody is going to help you reimagine some of your brand architecture so that it fits the regulatory regime, it fits the demographic of these east coast states because it is a little bit different. It's not just priced in potency out here. So I think those are the areas that we think are interesting and the nice part is the margins of fantastic. We get about 50, 60% top line gross margins on revenue on our plant touching and about 40% margins on ebitda side because we're not supporting these massive retail infrastructures. We're just selling into all of those folks. It's a little different because people here are multi-state operators, you must be competing with folks. Not really because the brands were looking to bring are the brands they're probably going to want to have to round out their own products, right? So I think that's what makes us pretty different.
RJ: Right. So sort of filling a gap and filling a need there that is again very much needed on the eastern half of the United States where the waves of legalization are catching up but again every state too just the regulations in every state I can imagine must be difficult to keep up with because of just how varying they are in different regions.
Gary: Yeah, one of our first brand clients that we signed on was Her Highness. So they're a female focused brand and it's a company that was started by women which is a great story, but it definitely is marked towards that sort of cannabis couture as they like to say. Their packaging is absolutely gorgeous and they really have got a great foothold in California and they want to come east, now they're based out of New York. So of course, they're trying to get to New York but nothing as simple as how do we get that beautiful packaging into Massachusetts where everything has to be child proof and the bags have to be opaque. So I can't let you see that packaging right? I've got to put it into some type of a foil bag. So working with folks to try to get them to understand, how do you keep that brand fidelity and stay true to the brand and still adhere to the individual regulations that are out there. It's not just about the formulations, things like that. Even how they market, now. we're not looking to do the marketing for them. We're trusting our brands to really be experienced marketers and their job is just to keep their brand fresh and make sure that it commands that premium price and it meets that brand structure that you've built you’ve worked so hard to build. We'll take care of everything else, we’ll manage your supply chain will help you get the products, we’ll make sure you're compliant on a regulatory basis and you can leverage our internal sales staff who are ready have the distribution nodes in the markets that we serve so it's definitely eye-opening for a lot of folks even the more sophisticated brands that we deal with as they look to leave that state. It's great that they've been able to build a premium brand in California. I think it says a lot about what that brand is but as they start to look at what it takes to scale that it is a different animal altogether.
RJ: Well, I just learned today we're recording this that New York State lawmakers did agree on a final bill for recreational cannabis legalization. So hopefully that'll make things a lot easier that would make New York one of the biggest markets in the nation and they've been trying to get this legalization done in that state for a while now and so this latest iteration I hope it works out for sure.
Gary: Definitely feels like it's about to get real. I think as the states around them start to the dominoes start to fall in New Jersey with Massachusetts at some point the pressure was just going to be too much to look the other way. I think COVID might have helped accelerate the necessity of the fact that you had essential service designation and the fact that it was an industry that was actually growing and paying tax revenues to these states. I think coming out of COVID it's an industry that really doesn't need help from the federal government just needs the government to get out of its way and I think those kind of momentum builders are huge. So how they roll it out the devil is always in the details. There are some states that were really efficient. Once they agreed to do adult use within six months, they had a functional good adult use program out there. There are others that are still figuring it out and they might be year two or three into the rollout. So it's a lot you're dealing with regulations at the inks not even dry on yet and then you're asking regulatory bodies to try to interpret that. One of my prior career stops was in casino gaming and equipment so I'm very familiar with all those different regulatory regime state to state. State and what it takes to win over the regulatory bodies and have them be thoughtful in building the industries and not accidentally be restrictive or have unintended consequences.
RJ: And you mentioned a little bit ago trends in CPG or consumer packaged goods. Today the latest numbers sort of estimate that the legal cannabis market is expected to reach about 37 billion dollars by 2020 so a pretty good number.
Gary: We'd like to see that.
RJ: We'll take a B. Yeah, so that's bigger than the entire industries of craft beer, prescription pain medication, the NBA, toothpaste, hard seltzer and over the counter sleep aids. It's a bigger market than all of those. So in your opinion, do you think an evolution toward traditional CPG or consumer packaged goods is happening in the cannabis sector today and how far off do you think that might be?
Gary: I think It's inevitable that it needs to happen. I think it's still early days because right now when you walk into some of these stores you can become overwhelmed. You just look at all these different packages, you talk to the budtenders to try to get some advice but you really start to try to figure out, how do I look at quality? Right? It all comes down to the quality of what I'm putting into my body and not having that federal regulatory regime where the FDA steps in and really makes sure that everything that comes out of your facility meets a certain standard. You are relying a lot on the brands that are out there to make sure that they're keeping check on the quality and they're keeping a check on making sure that there's good brand fidelity and you're seeing some brands trying to come from west to east. I think there is still a little bit of a difference with the quality levels. It's not always a given that the name brand that you tried in California might have the same, you have the same experience over in Massachusetts or New York or something like that. I think that's where the devil is going to be in the details and when you look at the structure of the industry I think that's part of the problem. When you look at all these MSO’s especially in limited license markets. They want to get the most revenue through their retail outlets, the margins look great, the economics are great. It makes sense. So they're all competing with each other and they're all developing their own brands but the amount of brands that cross pollinate amongst MSO’s I think typically about 70% of what these folks carry our their own product as their grows get more mature. It's probably going to be even more. So how do you get MSO A to sell their product to MSO B to try to create a larger brand awareness out there. You're going to need these independent brands I think to step up like a Her Highness and really be somewhat agnostic, really focusing on the consumer and bring it in so you can round out the set. Yeah, so I think it's coming. It's very early days and I think watching how these come across and that's where the contract manufacturing when I said earlier doesn't really excite me. When you do pure contract manufacturing and I pay a licensing fee to somebody, as the producer, I'm going to do what I can to manage my margins, meet the SLA s the requirements but I'm not going to do a lot more because what's in it for me at the end of the day and the brand may get their pay out based on a top-line revenue number once that's paid out. How do they stay in the game? We're focusing more on partnerships where we share in the gross profit. So if you're keeping your brand tight and fresh and you're still commanding a premium and if we're good at what we're doing on supply chain management everybody benefits. Because then it becomes a real partnership and then you end up with a brand that is the same in New York as it is in California. So you don't have to worry about that drop-off.
RJ: Right that consistency is certainly key and needs to be absolutely a focus when it comes to expanding this market across the nation. Obviously, this would all be a lot easier if cannabis was federally legal in the country. Hopefully, we're getting our way to that that promised land. However, there has been recent news in the past few days that I mentioned at the top of the show in that a few White House Staffers have actually been either asked to leave their positions or asked to work remotely after finding out that they have taken part in past cannabis use we reported through TRICHOMES that the incoming Biden administration had sort of more or less caused people to let their guard down in saying and updating the verbiage to include terminology that said that like past cannabis use isn't an automatic disqualifiers for federal employment and yet we have these five individuals who are facing consequences for their past cannabis use. So I'm just interested in your thoughts on that because White House Press Secretary Jen Psaki during a press conference just the other day sort of doubled down on it stating that if cannabis was federally legal it would be a different circumstance. So just what are your thoughts on that in this age in 2021 and where we have the majority of states either have at least recreational and medical legalization implemented and yet federal employees are still facing consequences.
Gary: Look we've seen that to even with veterans and veterans benefits where they're actually using the cannabis plant for medicinal purposes for PTSD and things like that so if it actually comes out they could end up losing their VA benefits and I think it's one of those bizarre moments where you have legalization in the state's medical or otherwise yet at the federal level there's that disconnect I think for us and I can't say that I know enough of the details behind what what these individuals might have disclosed or was there anything else involved it's hard to say. I know when we tend to look at folks that when we were onboarding people we take a look if they've got prior cannabis convictions for example, so not just admitting they used it. But maybe they have something in their back history as long as it's nonviolent will employ them because as far as we're concerned people should have a right to be able to move forward if you did it legally that's of course the better way to go if you did something illegally as long as it wasn't violent it's kind of a gray area right now and I think we have to be willing to at least look at each situation individually and see what really is behind that. So without knowing the details and I don't think we're ever going to really know all the details. What was said, what else might have been involved that's always the big question but we think that something like that especially in a situation where if somebody did something in a state that was legal to deny them solely on the basis of that some type of federal employment does seem a little odd right now. It's unfortunate that these folks are being dragged through some of these things but I guess I can't really pass judgment yet because we just don't know all the details behind some of those things but it's definitely strange to be honest. It's kind of like when you think about CSR initiatives for the diversity equity and inclusion initiative that you see throughout cannabis and I think this is one of those few Industries where it's so prevalent. Every industry wants to say they're doing those things. Here it's so front and center top to bottom and the passion that you see for the plant and the industry is at the earliest levels which is usually in a big company, the folks downstream, the frontline workers are probably not quite as passionate as some people further upstream. This is almost an inverted industry. The true passionate people are actually on the front lines there in the stores, right? What does it really mean to say those things? Like we're going to be inclusive, we're going to allow people with prior cannabis offenses to work for us. What does it mean to say it and what does it mean to do it? And I think that's where just in general as it pertains to this industry and things that touch this industry. I'd really love to see leadership take a stronger position on designing, what is that mission, what is the value, what is the underlying thing you're solving for when you say you're going to do these things when you say you're going to allow people who use cannabis to work for the federal government. Well, what were you trying to say and solve for at the time that now all of a sudden you can't seem to do so. It's actually delivering on the action as opposed to just speaking the words because it sounds like the right thing to say.
RJ: Right. Yeah, yeah and a reporter pressed Jen Psaki on this issue the other day and cited Vice President, Kamala Harris’s is past cannabis use which she has admitted on record on a podcast on I forgot what was called, on a podcast through with Charlamagne Tha God and admitted that she had used cannabis in the past and then sort of alluded that so well if she did it. But my question In regarding that is you personally have over 24 years of experience in consumer credit, financial services, gaming and technology. Like you said higher education, specialty pharma. You've recently worked with the cannabis company Colombia Care, you hold an investor relations charter certification from the National Investor Relations Institute and a political science degree from Boston University. So my question for you is what still needs to be said about the cannabis consumer in regards to the ability to have cannabis be a component of your life and still undergo very important high-level responsibilities because ever since the wave of legalization in the cultural Zeitgeist revolving cannabis there has been this move to sort of rebrand the image of what a quote-unquote stoner might be and but we still face setbacks such as this. So what do you think still needs to be said about the average cannabis consumer in this day and age?
Gary: I think as more studies come out and unfortunately we just don't have the clinical evidence right now to go with the medicinal purposes. You're trying to destigmatize. This is one of those emerging industries that everybody knows about and everybody has an opinion about versus let's say cryptocurrency where I still don't even understand what it is.
RJ: So what is blockchain? I don’t know.
Gary: Exactly and the problem there is if you had discovered this plant today, it would be the wonder drug. You'd find it down the aisles of Whole Foods you’d be able to buy all different variations on it. This is great. Look at all these things you can do but you have almost a hundred years of prohibition and racial inequality. They've all been filtered into the thing called cannabis but if you look the demographic is really starting to shift and I think you see it more on the east coast where this isn’t episodic anymore. This isn't just about let's go out, let's get high every weekend or something like that. You're seeing people looking for real use cases. I'm trying to relieve joint pain, I have anxiety things like that and you look at the form factors out there. And yes flower is still prevalent in people like that because of the absorption factors but you see things out there that 15 20 years ago you probably didn't see or even think would be something that you would use cannabis for and certainly CBD is helping along the way too. So it's one of those where the more we can do to educate people so that it doesn't become this episodic stigmatized plan and you can see the responsible uses. I think you just see demographics too it's no longer the 25 or 30 year old male. It's starting to become that 40 plus year old, the soccer moms out there, there's rational use cases and I think that's just going to take some time. The early days I think of the cannabis industry was great to get the legalization but a lot of cannabis companies leaned into it right? The names they use, the logo they use and they wanted to buy off of that counter culture and to a certain extent I think they did themselves a disservice. My former shop Colombia Care I thought did a phenomenal job going down the medicinal side and people take you more seriously at that point and treat you a little differently. And as you then expand your product set to include some adult use cases. It's a different feel to it, it lets you understand that there's a real use here it's not just about recreation. So I think it's just going to take time and I think as the industry grows up. Unfortunately it’s growing up before everyone's eyes so you get to see all the good, the bad and everything in between but I think it will get there. If we can get clinical studies going if we could get more use cases. I mean look at the way Europe is trying to go about it right there seeing start with the medical side of things. So I think that's a good way to go.
RJ: Yeah, and we can only hope for more progress. Like I said, it certainly seems like we're moving in that direction and we may face setbacks such as this every now and again but it does seem something that is inevitable, cultural change and cultural perspective is a big ship to turn, it's a big frigate to turn. But there certainly is the wind in the sails just to beat that analogy to death that I feel is inevitable in this country.
Gary: And I think podcasts such as this or helpful instead of just two guys hot boxing and sitting here being stoned in front of everybody. Right? I mean, are there podcastor two guys just get on there and get drunk all day and talk to each other probably not but I'm sure there's some somewhere but we can kind of dial those back a little more and focus more on things like this. It helps accelerate that acceptance I think.
RJ: Yes, absolutely. Keep the eye on the prize definitely for sure and then we could all we can all kick back and and sesh once the work is done, right?
Gary: That's right, that's what we use it for.
RJ: Yes, indeed. It's the reward at the end of the day. Yeah, practicing delayed gratification. We could all practice delayed gratification a little bit. Hey Gary thanks so much for joining me today for this conversation. I really appreciate your perspective on the trending news in cannabis. Please keep up all the good work at TILT Holdings and I wish you all the best and I wish you and your team continued safety out there and health and wellness.
Gary: Yes, you too. Thank you so much for having me on you.
RJ: You got it, be well, we'll talk soon.
Gary: Sounds great. Take care.
RJ: My thanks again to Gary Santo for joining me. If you are a member of the cannabis community and have a story you want to share with us. We would love to hear from you. You can reach the show at hashitout@TRICHOMES.com. You can help others find the show by taking a moment to subscribe to the podcast and write a review. You can also join the discussion with industry insiders and get your voice heard by joining the community at TRICHOMES.com and following us on all social media. Hash it Out is produced by David Fortin and presented by TRICHOMES.com. I'm your host RJ Balde and I'll catch you next time