Matthew: Hi, I’m Matthew Kind. Every Monday, look for a fresh, new episode where I’ll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry, learn more at cannainsider.com. That’s cannainsider.com. Now, here’s your program.
Business models that exist in other industries are making their way into the cannabis industry. Today’s guest is Alex Coleman and he is going to explain how his company, TILT Holdings, is aiming to become the Swiss Army knife of business to business offerings in the cannabis space. Alex, welcome to “CannaInsider.”
Alex: Thank you. Thank you for having me.
Matthew: Give us a sense of geography. Where in the world are you today?
Alex: So I’m actually in, we have a office in South Florida in part because the weather in the Northeast has been a little bit challenging right now. Our primary office is in Cambridge, Massachusetts. We have four or five offices around the United States, Toronto and London at the moment.
Matthew: Okay. And I’m in Seaside, Florida today.
Matthew: What is TILT Holdings on a high level?
Alex: So TILT has progressed into becoming the leading provider of products and services to other businesses operating in the cannabis industry. And if I could just, I’ll do a little bit of background there. Essentially, we provide, on a contract manufacturing basis, marijuana in a variety of form factors of vaporizers, inhalation devices, business and consumer delivery, and a broad suite of software products to about 1,500 retailers and customers and brands throughout the U.S., Canada and Europe. And it’s an important distinction, though, that most of the products that we manufacture on behalf of our clients are customized to their specifications and branding. And the mission for our company is really to enable them to operate their businesses more efficiently and connect with their consumers more effectively. And that’s the goal of the company.
Matthew: Okay. Alex, can you share a little bit about your background and journey and how you got into the cannabis space and started TILT?
Alex: Yeah, my background is traditional middle market private equity. I ran funds for Citicorp and prior to that for Dresdner Bank, Allianz. Always U.S. middle market-focused, three primary categories of industries. One is food and beverage, which obviously comes into play a little bit in the industry. One is information and business services and the other is specialized manufacturing, defined as sort of a low volume, high margin type businesses. And I was introduced several years ago into cannabis, looked at a REIT and you notice some odd discrepancies around the way that those are structured. And then you go and do a little bit of work in the federal-state conflict and then you look at demand and you certainly define a clear path into how you wanna get into the industry.
Matthew: Okay. What do you think about… The number of publicly-available traded companies in the U.S. is shrinking and private equity seems to be growing. Do you think it’s because of the regulatory hurdles and compliance hurdles of being a public company?
Alex: Are we talking generally or specifically for cannabis?
Alex: Yeah, no question about it. I think that the, you know, as soon as you introduce things like Reg FD and additional reporting requirements and limitations on the information you could provide to the market, it became very challenging to operate a public company. And the proliferation of private capital gives you real viable alternatives to never have to go public. So, you know, I think there’s a variety of contributing factors that, really, people think there’s far more balance now in staying private versus going public. Whereas 15, 20 years ago, there was no question you would go public as the capital markets opened for your sector and your business.
Matthew: Yeah. And sometimes I worry about the bifurcation of society as the people that have the ability to access private equity continue to do well and then people that have this shrinking pie of public equities they can participate in. I wonder how that’s going to change things at all and make them different. I mean, I don’t know if you saw the acquisition of SeedInvest by Circle, that app, to maybe start to socialize private companies more. But that’s still to accredited investors. So I wonder what the future looks like there. Any thoughts about it?
Alex: Yeah, I mean, it’s an interesting discussion because, by virtue of the fact that if you talked to most market participants today, they would argue retail investors should only buy ETFs anyway and that one-off stock-picking has gone the way of every other, you know, past business that is largely inefficient, lack of information, lack of timing. And I think that the, look, if you have a pension fund, if you’re participating in, that’s going to be in private equity. It’s also going to be in the public markets. So, like, there’s a lot of different ways that the average retail investor, through some tertiary means, become a participant in both the private and public markets. I also think that from an analytical standpoint, you know, there are ways for individual investors to participate in VC startups, high risk, potential high return, but it’s extremely high risk. So I’m not as concerned as the private market provides an alternative for larger cap companies, higher growth companies, because a lot of people end up being inadvertently investors in those companies through other means anyway. So I’m not sure, I think the market’s evolving so quickly, I’m not as convinced it’s leaving people behind as it is probably decreasing the risk profile for most people that maybe shouldn’t be investing in the markets anyway.
Matthew: Okay, fair point. Now let’s dive into TILT a little bit more here. You gave a quick overview of the different companies involved there, just kind of in market category. But can you go into the companies that comprise TILT so we can understand at a more granular level?
Alex: Yeah, I can. Although it’s funny, we’re so integrated at this point. And so the history… So maybe I’ll work backwards and maybe through the supply chain and it’s easy to understand how we put this together. So if you start, what was Baker Technologies? It was a CRM SaaS platform, which is a very sophisticated way of saying that it simply connected retailers with their customers. And the reason is there’s a nuance in the law that prohibits those retailers from keeping customer data on a recreational level when they walk in and walk out. If you opt into a Baker platform, then the store can actually stay in contact with you. And then we go and drive growth. We drive growth through promotional activity, through weather alerts, sporting events, trial on new product developments. We have a over 10% clickthrough rate, now that that’s where it started. Then we added a company called Blackbird, which is a business-to-business and business-to-consumer delivery company also providing the software and services for supply chain management.
Well, now we can go and help those retailers manage their inventories better, connect them with original equipment manufacturer suppliers. And we can also do last mile delivery for them if they choose to use that service from us. So it’s very, it becomes very integrated with what was Baker in terms of that customer connection tool. Jupiter pens, working all the way back then, fits in that ecosystem perfectly. We can take unfilled cartridges, bring them to the manufacturers, take up the filled cartridges, bring them to the stores. And if the stores so choose, we can actually drive foot traffic for consumers to buy the cartridges.
So now our entire, what was our infrastructure asset platform, which really is, again, describes our manufacturing capabilities in marijuana, well, we now put that into the same supply chain and offer the same contract services to our customers. It’s important to note that just about 72% of Jupiter pens are actually customized for our clients. And we look at the same kind of ratio for our marijuana products. If they aren’t customized and they’re really sold wholesale, TILT is not currently in a branding category in the market.
Matthew: Okay. So we did have Joel, the CEO of Baker on, gosh, maybe a year or two ago. And it was really interesting to hear how all the different ways that dispensaries can touch and reach out to their customers. And I found that fascinating. You seem to have, like, an overarching strategy here. Is it happening kind of organically or do you kind of have a master plan where you’re having, as a customer comes in, there’s more opportunities to work with them than just one? Obviously, you know, they come in as a Baker customer, but then you’re talking about vape cartridges and delivery and all these other things, too. Is there a larger vision on where you’re going with TILT here?
Alex: There is. I think you need to pick, even though a lot of markets require to be vertically integrated, meaning you need to cultivate and process, package and sell, it doesn’t fit our business model as much. And so as we think about our business model, it’s supporting companies that want to develop a retail strategy and/or a branding strategy. And that really requires connecting with a customer. And so I think about our company as enabling all those companies to do their jobs better and connect with the customers more effectively. And so that opportunity for us continues to expand in terms of providing supply-side services to all these companies, whether it be software or physical delivery, or both, that really enables the industry to grow and then we grow along with it. And in part, it’s an acknowledgment that the industry is in a very nascent stage of its lifecycle.
There’s probably $10 billion of trailing revenue collectively. By our math, if you take some of the data coming out of the recreational states and simply extrapolate it across the country, it’s most likely a $100 billion annual market. And that lines up nicely with maybe the beer market, that’s $111 billion, and I would put a footnote that that does not include medical products. That’s really just a recreational view of where the market could go. We simply wanna be in a position where we can help the industry grow and also benefit financially for our company and deliver returns to our shareholders. So it’s just a slate, you know, I think that’s our specialization. We’re not in the retail business, as I said, we’re not a branding company and largely we’re really not a cultivation company. Where we do cultivate, it’s out of necessity where there’s just short supply in the market. But you don’t have to be a vertical. We don’t have to be a vertical. We can, in other states like Nevada, Colorado, California, Washington, Oregon, you know, we can buy the commodity product and then add the value for our customers and deliver it to the shelf.
Matthew: Okay. There’s a lot of moving parts here and deep domain-specific knowledge that’s required. You know, I’m thinking about Baker in particular, but also for delivery software, I mean, each state has essentially their own market and has its own regulations. How do you keep up with that and also kind of prioritize what the best opportunities are as you go along?
Alex: That’s a very good question. I think that what we’ve done internally is kept businesses functioning independently where they need to adapt to evolving state laws. Someone described it to me as wearing ballet slippers to work every day. We have two primary silos. We have our software and services division and that contains the Blackbird and Baker and some other ancillary services. And then we have the consumer devices and packaged goods division. And that’s as it sounds, it’s selling the hardware as well as marijuana products. And really by bifurcating the company like that, it allows us to augment all those expertise both across each line. But within those silos, there is a lot of overlap in all of the previous businesses that now, in many parts, just share headcount. I mean, most of them are just fully integrated now.
And the nice thing is, too, we can leverage all the market data to help our customers. When we do acquisitions now, it’s an easier fit. You know, we have a very robust discussion at the management level, how they would fit not just from a product standpoint but culturally. And that’s really enabled us to take advantage of what is incredibly, as you point, it’s just a very fast evolving market. And so you need to make sure to have a tremendous amount of flexibility in your business model to adapt as laws inevitably will change. And importantly, consumer preferences will change.
Matthew: So with the passage of the Farm Bill and hemp becoming legal, what kind of opportunities pop to top of mind for you? Or how did your thinking change as that got signed into law?
Alex: I would say two distinct parts to that. One is, so hemp extract oil, which I believe it’s what it’s gonna be called now, with less than 0.3% THC is, it’s a commodity. You know, the prices will simply come down as supply comes on the market. And the question is, you know, where can TILT benefit from a product standpoint, delivering to clients or an end product. And, you know, we’re working in-house right now to a more larger scale of manufacturing, which we can’t do in marijuana products, to deliver product across the states. Drinks come to mind, topicals come to mind, and to some degree, nutraceuticals come to mind. So that’s where we’re focused. And the in-house knowledge we have around extraction techniques, delivery, and not just delivery. We don’t have to use our own. We can obviously use third parties now because it’s legal and it’s just about our getting endorsed, right, for CBD products.
The other part that I think is very interesting is, you know, everybody talks about the legalization of marijuana, they’re both cannabis sativa plants. But talking about the legalization of marijuana, you know, watching the FDA machinate over generally regarded as safe practices and reevaluating all their consumable directives, you know, is definitely cause for concern. And a lot of senators are pushing them to come out with regulations faster that clarifies how we can, and any market participant can deliver product to the shelf that kind of adheres to the guidelines provided by the FDA. We don’t have those guidelines yet, you know, so we’ll see what happens. I mean, it could be, it could be unknown. It’s a consumable product and their job is to protect the welfare of the citizens. So we just don’t have any visibility yet on what changes they might make to allow hemp extract oil in a drink product, for example.
Matthew: Okay. And is there any other legislation that you’re excited about in terms of it being like a big opening and, like, as big as the Farm Bill where you’d say, “Wow, this is another big milestone we’ve reached in terms of legalization,” apart from, you know, just the federal government stepping aside and letting states regulate as they will?
Alex: Well, I think some form of the SAFE Act looks like it’s imminent. And the SAFE Act is basically just protecting us for the banking side. What it does beyond that, we’ll see. I mean, it’s such an interesting evolution of a market where, you know, you have $10 billion of historical revenue, largely, cash transactions. We are aligned with the federal government to make sure that that is visible and transparent and taxes are paid. You know, we obviously have a problem at the retail level around taxes. You know, we’re stuck with a 1983 crystal meth ruling against a drug lord. You know, we pay taxes where we can’t shelter any store expenses. How much they tackle with what’s called the SAFE Act along with banking, we’ll see. It’s challenging for the industry right now, but that, I think that’s the most likely. The STATES Act is the one that legalizes it, again, whatever definition you wanna use. And that seems to be less sure right now.
Matthew: How do you think exponentially changing technologies like AI, gene editing, nanotechnology could perhaps change or enhance the cannabis industry?
Alex: So, you know, you have to come into the industry and say we’ve had a 50-year medical blackout on research and broadly. You know, we have now partnered up with people that actually have DEA licenses and have been doing work in cannabinoids for 30 years, but they are not the mainstream. And there’s an infinite number of white papers around the health outcomes of using cannabis independently or in conjunction with medical. But again, they’re suggestive. So, you know, I think it’s a high-level opportunity for us as a company. You know, we have a very robust science team, a lot of formal relationships with medical professionals and we’re working diligently to make sure that we can discover ways to address basic conditions. You know, gene editing is interesting because you can obviously help plants grow faster. As importantly, to me, you can also reduce the negative influence of aphids or powdery mildew through that as well.
Now, do we produce plants that have, you know, you do a terpene profile that addresses a specific medical condition through that? We might be able to. It’s just, you know, we’re putting a lot of money and time behind it and there’s some near-term advantages, but I think you have to have a long-term view on that. It is not something that’s gonna happen overnight. And as I said, you know, we’re just starting to pick up momentum now on new research around using CRISPR nine technology, for example, to help the plant evolve into something that’s useful for the consumer or the medical patient.
Matthew: So big alcohol and tobacco companies are making investments in this space. Are there any other types of traditional businesses you see making big investments either now or in the near future?
Alex: You know, I would hope healthcare pays attention and invests and, you know, even a middle company, I would call middle because a lot of consumer products like a Johnson & Johnson seems ideally suited for it. You know, and Estee Lauder might be ideally suited for it in terms of, you know, they use tobacco in most of their products in terms of certain, you know, as a derivative ingredient. So, yeah, I mean, I, you know, tobacco feels a little bit defensive. When we open into a recreational state, we see low-end wine and beer sales plummet. And it could be share-of-wallet, it could be an enhanced experience where you just don’t need to drink as much. And so those companies need to really understand it’s the same consumer and they really need to figure out the shift in preferences and that’s why it makes sense for them. On the other side of that coin, you have maybe an offensive investment by a J and J or some company like that that really wants to go and pioneer new CBD, THC products for specific medical conditions.
Matthew: Okay. Well, Alex, you’re in a position where you’re having to make projections, talk to investors, look at all these hard objective facts all the time, but it’s equally important to dream big and have a big imagination. If you were to look out to 2030 and say, “Hey, you know,” I know this is wildly subjective, but what will the cannabis industry look like then? I mean, what do you think we can dream about that will come to pass?
Alex: 2030 is about a century in cannabis time. I would hope that every state in the United States, Europe, Pan-Africa, that these countries have evolved to allow their citizens access to marijuana products in whatever form factors they want. You know, we see trends in consumer preference driving towards micro-dosing. I think if you think about basic, you know, anxiety, sleep, we have the product that can really free people from synthetics and allow them to incorporate it into their day to day lives in a very healthy way. I mean, for goodness sakes, for some reason, cannabis rebuilds your epithelial layer in your gut, protects your liver. There’s all sorts of things that come from this.
So my hope is we get through the next 10 years and we shake this social stigma that came from, you know, Nixon in 1970 and that with a right amount of research and investment dollars, you know, the consumer now adopts this same way they have alcohol in their house or anything else. And the biggest difference between alcohol and us is it’s actually very healthy and it can be very specific in terms of the outcome. Now where they buy it is gonna be interesting because I think in 10 years, you know, you’ll see a lot more home delivery or mail order. You’ll certainly see mail order, direct to consumer with CBD products. And I think that’s gonna be another difference, that the whole supply chain is gonna be expanded a bit.
Matthew: Okay. Alex, I’d like to ask a few personal development questions to help listeners get a better sense of who you are. With that, is there a book that’s had a big impact on your life or way of thinking that you’d like to share?
Alex: No, I couldn’t say it would be a specific book. I think you’d have to go, anything from, you know, a Frederick Taylor book to, maybe from a good to great type book in management. I’m learning on the job every day. It’s, I mean, I feel really fortunate because I learn something, more than one thing every day, and something about myself. And so I think you have to bring an amalgamation of experiences just from private equity, just from my own intellectual curiosity that really helps make decisions. I mean, you know, one of my favorite quotes is, you know, “The harder you work, the luckier you get.” You were asking earlier about, you know, by design or by fortune, I mean, you know, we are, every single person in my management team and hopefully everybody in the company, this is a very consumptive industry and you have to love it. You have to love the frenetic pace. Now there’s no way to help those decisions and structure them, you know, unless you’ve taken a broad approach in everything, including the background of materials that you like. And so, I mean, I would attribute it to, I mean, even, you know, from ”Zero to One,” the Musk book was great and what are, you know, just some people just aren’t asking the right questions. You can draw from all of these things.
Matthew: Yeah. I have a Peter Thiel question for you in just a moment, but first, is there a tool that you and your team use that you consider really valuable to your productivity that you’d like to share?
Alex: Well, I mean, you know, from my own background, personal interaction is key to idea sharing. We have a sort of a on-demand every Monday. The entire management team gets on the phone for as long as it takes and goes through sales reports, product development successes, failures, needs excesses. It’s shared across most silos inside the company. And so for all of the great intranet tools and all the other technology we have available, I find that unequivocally, the most important part of the week is that call that helps everybody understand exactly where we are as a company and where we’re trying to go.
Matthew: Okay. So you pull up sales reports, numbers, projections and things like that. And when you’re on that call, is there anything that in particular you feel like is the most important thing or a hurdle to get over or target to be hit that you feel like, “Hey, if I only do one thing on this call, it’s gotta be this”?
Alex: So it’s not as specific as that. You know, it’s more about, you know, big customers. What are they asking for? What do we need? How can we cross-sell products? So the most important thing coming into the call is making sure that we transition, continuously transition the company and evolve it in a way that’s meeting customer needs. So, you know, usually, we get off that call with a dozen good ideas around how to improve our product offering for our customer base, which is the other businesses in the industry. And there’s no call that we don’t have where there’s an overlap of customer or an overlap of product idea, sales initiatives or all of them. And so, yeah, they’re very fruitful calls.
Matthew: Okay. Now here’s that Peter…you mentioned the book ”Zero to One” and here’s a Peter Thiel question for you. He’s the author of that book. What is one thought you have that most people would disagree with you on?
Alex: I would say I am not interested right now in seeing marijuana become legal federally.
Matthew: Okay. And why is that?
Alex: You know, as I said earlier, the Farm Bill really is a good test case for what happens when the federal government becomes involved. There’s no current oversight or legislation on the federal level. At the state level, we have very specific requirements about lab testing, quality of product, delivery of product, a seed-to-sale tracking system that doesn’t let anybody sell product at the point of sale unless it started in that state. Now is, like, the introduction of federal bodies like OSHA, the FDA, other groups, is that a good thing? You know, I mean it’s like “Charlie Wilson’s War.” Maybe. Maybe, maybe not. We know what we have today and the number of shifts we have to take a week, the shifts in packaging or delivery or how we test product on a state by state basis right now is infinite. And so we have a lot of requirements that will only be increased with a federal government position that makes us legal and then the intervention by the federal government in the evolution of the industry.
Matthew: Okay. So kind of to go back to your point earlier in the interview where the regulatory and compliance and all those costs just go up a lot and you’ve got a lot of different referees on the field making different calls and it just gets confusing and expensive.
Alex: Yeah, well, that, so there’s no question about that. And again, it’s not that I don’t… It’s an eventuality. My concern is that the industry has the right amount of time to educate the people that will write the laws that eventually govern the industry. That’s all. So it’s not opposition, it’s more acknowledging that it’s not as simple as saying we’re gonna make it legal tomorrow because that has a large number of unintended consequences. Now, the other side of this, my other big concern is, you know, as an industry, we might be spending $5 million or $10 million a year on lobbying efforts. You know, I think the drug industry, the last number I saw was $125 million. Now, what is cannabis doing? It’s providing an alternative to the proliferation of synthetic drugs that have only become available because cannabis was illegal, right? Opiates, etc., or sleep aids, anything that had been synthetic. Now, we have the solution.
My other concern about the legalization is that the drug companies get involved and writing some type of the legislative initiative that then makes it more challenging for us to simply get a product to the customer that’s safe and easy to use. You cannot overdose on THC. There’s no long-term organ damage. You know, we have some very accelerated programs right now for post-op recovery, which hopefully will take the place of opiates. And my concern is if we don’t accelerate that knowledge base fast enough and the federal government takes a position backstopped by, you know, a $125 million lobbying effort, well, the net loser’s gonna be the consumer.
Matthew: Right. That’s kind of, those… What you’re describing there is invisible to most people. They don’t think about that, how big interests sometimes come in, in this to craft things to block out other entrants is essentially just defense. They’re paying for big defense and limit their competitors. So, well said. Alex, as we close, how can listeners find your stock ticker and also how do they connect with you and find your websites and so on and so forth?
Alex: Yeah, so the URL is tiltholdings.com. T-I-L-T, Holdings. We are traded on the Canadian Securities Exchange or more familiarly known as the CSE under the ticker TILT, T-I-L-T. And I believe within the next 24 hours for U.S. investors, we are gonna have our OTCQB listing, which is basically linked to our Canadian Securities Exchange stock under the ticker, T-I-L-T-F.
Alex: So, you know, it’s readily available. It’s a good retail stock in terms of accessibility.
Matthew: Okay. Alex, thanks so much for coming on the show today and educating us and good luck for the rest of 2019.
Alex: I appreciate your time. Thank you very much.
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