Cold Open On Saying No

SPEAKER_00 0:00

So there's a inside joke at my company. I'm called no deal because I shoot a lot of stuff down. Again, I'm very protective of our margin. It takes, especially on like the retail side, because every time you grow, it just takes it's so long for the capital to come back that you will quickly exhaust your resources if you are not really intentional.

Welcome And Labor Day Catch-Up

Ben Larson 0:42

Hey everybody, welcome to episode 152 of High Spirits. I'm Ben Larson.

AnnaRae Grabstein 0:48

And I'm Anna Ray Gramstein.

Ben Larson 0:50

And we've got a great conversation for you today. We have John Lafata, the CEO and co-founder of Big Oil Company. That is an ominous sounding name. I'm excited to dig into that. But before we do that, I hope you all had a nice Labor Day and getting some Monday vibes on this Tuesday morning. What are you thinking, Anna Ray? Monday vibes.

AnnaRae Grabstein 1:10

It's so rough after a three-day weekend, but also amazing because it's a short week. And um I have to short weeks amazing?

Ben Larson 1:18

I don't know. It just feels like it takes.

AnnaRae Grabstein 1:21

Like you're already behind, right?

Ben Larson 1:22

It's a lot to do. Tuesday feels like Monday, which means I don't know. I don't know if I like short weeks anymore as an adult.

A Sophisticated Gmail And Crypto Scam

AnnaRae Grabstein 1:31

Well, I had kind of an eventful weekend. I um got insanely hacked in my personal Gmail and um almost scammed um out of transferring money to the hackers. Like it was such a sophisticated hack and scam. It was really wild.

Ben Larson 1:52

So they weren't just asking you for for gift cards.

AnnaRae Grabstein 1:56

It was um Sunday morning. I got this call from somebody that said that they were from the trust and safety team at Google and said that they were investigating this major hack of like the third-party connectors of Gmail, and it all seemed very legitimate. And um I have a good bullshit beater, and I fell for this guy's bullshit, um, who basically created this fear in me that that some that my account had been compromised. And then um 45 minutes later, I got outreach from Coinbase, where I have some crypto, and they were saying that Coinbase had been compromised and they wanted me to transfer my crypto assets into this special vault. And the whole thing, like it all seemed very real. And at some point, I started to really question it, and I'm so glad I did. Um, I was able to stop the hack, but the hackers had gotten into my email and were basically trying to reset passwords and use my email to do so, and then were deleting the emails so fast that I couldn't even see them inside my own email.

Ben Larson 3:10

It was crazy, you guys. Oh my god. I I just completed my ADP training as a part of my HR responsibilities at work, and uh that that's what they say. This is like they the the fear base like put you in a reactionary state, and you just like get into this mode of like doing whatever someone says. It's pretty, pretty wild.

AnnaRae Grabstein 3:31

It was really wild. I am very lucky that honestly, it was my husband who was next to me because it was the weekend, and we were trying to leave to go to the beach with friends, and he was listening to what was happening, and he was like, hang up the fucking phone.

Ben Larson 3:48

Oh my god, thank god for that.

AnnaRae Grabstein 3:51

It was a good impulse. Um, how was your weekend?

Bike Park Chaos And An ER Run

Ben Larson 3:54

Oh, it was good. I I think I was largely looking forward to a relaxing weekend, and so we didn't have a whole lot planned. And uh sitting around yesterday morning, and and uh my son, Alistair, was like, hey, can we go to the bike park? And I'm like, sure, why not? And so we we grabbed him and his buddy and we headed out there, and this place is epic. It's Stafford Lake Bike Park in Nevado in Marin County, and I don't know, this should not be as an adult, I don't know if this should be generally open to the public because this place is pretty epic. But um we we were hitting the jumps and everything, and and well, long story short, I got to spend the last half of my labor day uh in the ER uh with my friend's, my buddy's friend. No, my son's friend, and um that's why I have bags under my eyes again.

AnnaRae Grabstein 4:47

But he's okay, sounds like he's okay.

Ben Larson 4:50

It was there was uh 29 stitches, I think, is what we what we found. And oh, that's legit. Yeah, I I you know like the adrenaline kicks in, and I just like grabbed him and like carried him down the hill and like got him in the car and then gathered all the bikes and got to the hospital. And um, yeah, it was clear that it was deep, uh, but it was no broken bones, thank God.

AnnaRae Grabstein 5:16

I'm really glad he's okay.

Ben Larson 5:17

Sounds sounds like cannabis, but that's that's my heroic my my context.

Hemp THC Delay And The Countdown

AnnaRae Grabstein 5:24

Amazing. Well, um, let's get into our news for the week so that we can bring on John shortly. Um, we've got two news stories for you. Uh the first is just a follow-on. Last week, when we were recording, uh we predicted that the continuing resolution resolution was going to pass, um, and it did. Uh, President Trump has since signed uh HR 6500, the Continuing Appropriations and Extension Act of uh for 2027, delaying federal restrictions on hemp derived THC products from November 12th to December 11th, 2026. The extension allows hemp formulations to remain on store shelves for an additional 29 days while wild makers work on a regulatory alternative to prohibition. Was a bipartisan effort to provide Congress with more time after standalone hemp legislation stalled in committee. However, the extension does not cover all products. Synthetic cannabinoids are prohibited, and um the White House has indicated that it will not support another delay beyond December 11th, but has expressed support for regulation over prohibition. The U.S. cannabis roundtable is lobbying for the ban to stand. The hemp industry, along with plenty of other multi-platform businesses, have a bigger vision and plan for hemp. I just came up with that concept of multi-platform. Really, what I was thinking about is businesses that participate in hemp, but have lots of other businesses too. I know you're following this, Ben. Uh you knew this would pass and President Trump would sign it, right?

Ben Larson 7:08

I I didn't know it was gonna pass, so because like I need to claim the win of the prediction, uh, which I think the vote was happening while we were while we were predicting. Um but but yeah, uh, you know, it's um the hemp industry lives to to fight another day. And there, you know, as we said last week, it's it's gonna be a big fight heading into the end of the year. So um I think everything we discussed last week stands, and yeah, we'll see. Uh it's it is interesting. There are a lot of conversations happening in the back rooms. I don't know what's public yet, but um, I think you'll see more engagement from both sides, the and both sides, largely meaning the MSOs, um, through through USCR or attach or whoever they whoever their allegiance lies with.

AnnaRae Grabstein 7:53

Yep. Stay tuned, everyone.

Schedule III And Interstate Commerce Risk

AnnaRae Grabstein 7:55

Um, and our next story uh is also about uh federal action and more on the Schedule III side. There's a new congressional report that just came out that says the Supreme Court may soon have to settle whether states can favor in-state residence and cannabis licensing because the courts are split. New York and Maine's residency rules got struck down, uh, but the Ninth Circuit upheld similar rules in Washington and California, reasoning that there's no constitutional right to protect a market that was fully illegal under federal law. But with rescheduling to Schedule III, it changes the calculus. And now there's a legitimate federal pathway for the product. And advocates argue that the normal rule should apply, meaning the dormant commerce clause, and that states can't lock out-of-state properly licensed operators. And if that argument wins, it could force state markets to open to out-of-state players for interstate commerce. And um, reform groups expect that lawsuits testing this in multiple states will happen soon. It's interesting the fact that the dormant commerce clause was struck down in the state of Washington years ago when Washington required um cannabis licensees to be residents has really changed the way that the market has unfolded in Washington and has kept out multi-state operators and the Washington market has stayed very unique as a result. A lot of just Washington-only businesses that exist in Washington. So I think this is really interesting.

Ben Larson 9:30

Yeah, I'm I I'm wishing I knew the the language of the order more intimately at this point, because everything I've known from, you know, advocacy for cannabis is that schedule three is not legalization, right? And so what is legal about this new Schedule Three marketplace that like how does that compare to what we were under Schedule One? Because yes, if you have a medical license in a state, you are now considered Schedule three, but that does that mean you're legal? And does that mean you can do commerce um across states? It means you can make federal tax deductions, but doesn't mean you're legal, right?

AnnaRae Grabstein 10:18

Well, you and I are not the Supreme Court, so we don't get to make that decision. Okay. But yeah, stay

Meet Big Oil Company And The Scale

AnnaRae Grabstein 10:24

tuned. Um let's uh let's cue up uh our guest today. Uh John Lafada is an entrepreneur and cannabis industry veteran with nearly two decades in the space dating back to the Prop 215 days in California. He's the founder and CEO of Big Oil Company, a California cannabis manufacturing and distribution company built around extraction, manufacturing, and copking at scale. You might know his brand, Bear Labs. And if you're a top cannabis brand looking for an extraction partner, you definitely know his name. He's a finance major by training. John brings an operator's discipline to an industry that's historically lacked it. And today he'll get into building a real discipline, what it takes to grow in a highly regulated market, and really pull back the curtain on everything related to extraction in the biggest market in the world, California. Although maybe did still get the claim that we passed up California, that just happened. Was it Canada? Canada and California are like right right there.

Ben Larson 11:24

Are they counting their international sales? Is that what's happening?

AnnaRae Grabstein 11:27

Yeah, something. Anyway, um, welcome, John. Really excited to have you today.

SPEAKER_00 11:32

Hi, hi everyone. It's a pleasure to be here. Good to see you in.

AnnaRae Grabstein 11:37

Yeah.

SPEAKER_00 11:37

And yes, Canada did surpass California, but that's an entire country.

Ben Larson 11:44

It is an entire country of several provinces. The home home of Lake America.

AnnaRae Grabstein 11:52

Yeah. So, John, why don't you walk us through big oil company, what you guys actually do day to day. Uh I know that you do some hydrocarbon and solventless extraction. Tell us about how much cannabis you're processing. Just give us a scope of where the company sits in the market.

SPEAKER_00 12:12

Sure. So as you mentioned, we do hydrocarbon and solventless extraction. Um we do not make distillate. Um, so all oil products outside of distillate is kind of what we specialize in. We try to really stay in our lane. Um, you know, we don't do pre-rolls. Uh, so you know, vapes and dabble concentrates is really what we focus on. Uh currently we're processing anywhere from 10 to 12,000 pounds a month uh on a dry weight basis for um for hydrocarbons. And for solventless, it's anywhere from four to six thousand a month, although we do have some new uh commitments coming in that'll probably push us closer to 8,000 a month. Um we are scaling fairly rapidly, uh looking to increase our hydrocarbons uh to about 20,000 pounds uh a month by the end of the year. Uh and then as far as packaging and white label services for other brands, you know, we are touching about half a million units a month at the moment, and we're looking to get closer to a million units a month by the end of the year. Uh, you know, we do about a 50-50 mix between our in-house brands that we sell at retail and the white label business and co-packing for other companies.

Winning In California Through Operations

Ben Larson 13:46

That's a lot of numbers. And I think sometimes for especially people like me, I start to hear these big numbers and like I lose the con context of of how big that is. But I I think what's really interesting about your story, especially being a California company, a market that is is famously kind of constrained and battled, is that you've actually had a really good growth trajectory over the last few years. And so you've been in the industry for for 20 some odd years, uh, and now you're growing pretty significantly over the last three years. Can you talk about that growth curve and and what you feel has led to that, understanding that the market is constrained and not growing as quickly?

SPEAKER_00 14:30

So we have grown close of anywhere from 20 to 30 percent year over year since we um entered the the legal market. Um, we did have some hiccups when we first entered with licensing partners uh that we had to uh kind of bail on and restart over from ground zero uh in the later half of 2020. But since then it's been pretty consistently 20 to 30 percent growth year over year. This last year has been our largest growth, which we're on pace for around 100% year over year growth. Um I think a lot of it just comes down to lack of capital. So in the beginning, growth was a little bit harder because there was a lot more competition. Uh, there were people with bottomless pits of cash that they could kind of throw at marketing and throw at new product development and you know, buying off bud tenders. And as the market compressed, um, operational excellence kind of took priority. So if you weren't making money, capital dried up and you kind of disappeared. So a lot of the brands when we first started that we were like, oh man, these are the these are the behemoths like that we need to look out for. They're they don't exist anymore. Um and so I think through just really focusing and on on margin protection for us has been a really big thing. Um and in this last year, because so many of our competitors have kind of dropped out, uh, it has allowed us to pick up the the business from them, and it's been very beneficial. Um I don't see it slowing down unless we're thrown a massive wrench by this schedule three thing. You know, I don't have a crystal ball, but I haven't been a fan anytime government has jumped into cannabis thus far. So we kind of just have to be agile and play as we go. Yeah.

The Road To One Hundred Million

AnnaRae Grabstein 16:43

We'll we'll talk more about schedule three a little later, but I think you know, you are you are expressing pretty much extra uh from my perspective, extreme ambition about the continued growth that that you can hold grab onto in California. Um, you told us last week when we talked that you're on target to do 26 to 27 million this year and that you plan to do 100 million by 2028, which would mean basically doubling again each of the next two years. And um that's all in California and all bootstrapped. And I'm wondering if you can talk a little bit about what it means to get to that hundred million in terms of how the business may or may not change and uh why you think you can get there.

SPEAKER_00 17:35

The business has already kind of started making these changes uh from a sense of my role in the company uh for the last five, six years has been just a firefighter, right? Every little thing, people coming to me. Um and so in the last, I'd say the last two to three years, we really started focusing on developing people and focusing on people. We have a fairly large leadership team. Um, and I have to, you know, tip my hat to quite a few of them for really taking us to the next level. Um, as we grow from where we currently are to 50 and then subsequently a 100 million, our biggest hurdles are space and power. Um, we're working on both of those. We've we have the space now, but power is kind of gonna be the one thing that holds us up. Um, you know, so whether it's the end of 2028 or 2029, we'll we'll get there. Um we're currently probably turning down between two and a half and three million dollars of revenue a month that we just don't have the ability to do. Um and as soon as we're able to slowly start unlocking more space, extraction capacity, um that that will get us a lot easier. And that's just on the wholesale side, you know, with retail, this was the first year that we really spent any money on marketing. Um, so we built out a customer success team that whole focus is just making our brand visible at retail, checking in with the bug tenders, checking in with the buying managers, just really being in people's faces. Um and that that has helped our retail numbers double over the last year. And so I think we're just going to be continuing to push what we can uh from a marketing standpoint, and that should really get us about halfway there. And then the wholesale side should easily pick up the other half. Um, there are some unknowns. Will will price and compression continue to get worse? It seems like this year um it picked uh it actually like some prices for certain products actually increased slightly. Um and so I if everything were to stay the same as it is currently, I think we have a very uh fairly easy path to that 50 to 100 million. If everything changes and interstate opens up, I think that number can be significantly larger.

How The Business Lines Evolved

Ben Larson 20:21

Yeah. Well, I I don't know if we're gonna get interstate, but I'll I'll guarantee you that nothing will stay the same. But uh I I I want to quicks quick sidebar because you mentioned power, and I don't think that's immediately obvious to everyone outside of California how hard it is to do power upgrades on on facilities. Like we've we've contacted PG ⁇ E before for an upgrade, and they'll like, oh yeah, probably two to three years. Where talking to some friends in North Carolina, shout out to OBX, I think they got their massive power upgrades, like as much as they wanted done in like three weeks. Uh so the beauty of operating in California. But but John, what what you started kind of uh sh describing is a very complicated business. You were talking about the retail side, the wholesale side, and and I know your your wholesale is even like divided up into the different segments of your business. Where did it start first off? Like what were you doing first? And then how has your business expanded into these different categories? And then like how do you manage that from like an attention perspective? Because like, you know, from a from a Virtosa perspective, you know, we're we're very narrow and and serve basically like one customer type in in different markets, but um, yeah, please like take us on that journey. Like, how how did you decide to kind of expand into the different markets that you have?

SPEAKER_00 21:47

Sure. So early, early on when Washington went legal, um, you know, I was already extracting and stuff, and I started seeing companies advertising essentially. on Instagram and I was like blown away as someone that always kind of lived in the in the shadows you know not trying to be very well known um and it led me to make a a a very small brand and go to local sessions and stuff and started to see the the power of of branding um did that for five to six years and then as federally or as as California started making advances to being legal I started um working with some of the larger brands that were going to be you know do pretty well on the legal market and I was processing just their their inputs making dabble concentrates for them um and moving into the legal market uh I was kind of torrent because I had experience with the branded side um but it was mostly at Sesshes and a very few select retails and so going into the legal market where I didn't have much experience you know going door to door to stores um I wanted some kind of diversification so we decided that you know we were going to continue to do both the retail and then the manufacturing and honestly and white labeling. And it it turned out to be a blessing because there were a few years where retail really carried us and our white label business was kind of slow. Most of that was due to we are not the cheapest out there. We try to provide an uh an exceptional product in our service and so we've had brands that have worked with us then you know they'll go somewhere else over a five cent discount and you know I I'm never upset about it. It can be frustrating but nine times out of 10 they end up coming back. And so how we kind of uh balance it um I have three other business partners one solely handles retail sales another one handles our wholesale and white labeling sales and then my third partner handles marketing. So I think you know all of us being kind of bootstrapped in this and all um coming from the traditional market we we each take our roles really seriously um you know I don't get involved in what goes on at retail I mean I'm I'm pretty opinionated so I I'm I may say what's on my mind but for the most part you know everybody does their job and it it allows us kind of to segment the business um and then from the manufacturing standpoint yes there's you know multiple different customers some solventless some hydrocarbon but for the most part it's it's just a process and um it's fairly similar it's just a different method of extraction um so I don't see too much like I'm not too scattered. It's it's really like I spend most of my day here at the facility um walking around talking with people seeing what what what problems I can help solve and and and that's really it. Nice.

Customer Concentration And Contract Reality

AnnaRae Grabstein 25:38

John you uh you work with some of the largest brands in California powering their products behind the scenes and uh when I asked you earlier if if you worked with small brands you basically said no you said that that it's important to work with big brands that can really kind of support you, your costs, the compliance, the quality all of those things. I think that customer concentration is something that developing B2B companies have to think a lot about what is the right amount of concentration to have in terms of the risk of having certain customers that might be an overabundance of your PL, but also the ability for those large customers to drive large amounts of volume and momentum in the business. And I'd love it if you could talk to us about how you see customer concentration, maybe on the wholesale side first, if it makes sense to talk about retail. But I think wholesale, you know, the California market is really complicated and there are a lot of brands but there's actually a pretty small group of brands that are ones that are driving kind of the top 30 to 50% of the market in most categories and certainly in vapes and in concentrates where you're computing concentrates is even worse.

SPEAKER_00 27:01

I think like the top 13 brands is over 80% of the market. So it's most of our our wholesale and white label business is actually for vapes um which is funny because it took us forever to really get a solid vape product that we felt comfortable uh putting under our own brand but we've been you know packaging and formulating vapes for other people for six seven years. So customer concentration is a touchy subject I would say in in our company because we've had it bite us uh a few different times uh where we had to massively scale up for a large contract that was let's just say 50% of our capacity and life was great for the three months that it worked out. And this industry is still very scared of contracts um no one wants to lock into a yearly supply contract or or or manufacturing agreement. So as I mentioned earlier that's kind of been one of our blessings with doing both retail and the wholesale side is because when you lose 20% 30% of your wholesale or white label business due to typically what happens is these companies will overproduce their their forecasting's off a little bit or the market changes and new competitor enter enters and so what they thought they needed they no longer need and now they've got the next three four months of supply uh locked in we also had some issues with our solvent supplier for a period of time that um caused some products to not meet quality standards and so you know we had to uh one of our biggest contracts had to go elsewhere until it was figured out um and they're back now and um everything's great but customer concentration is is I guess it's a double-edged sword right you want those uh you want those big contracts because it costs me the same from the compliance side of like if I process a batch of vapes that's 10,000 units per per flavor it's the same cost for me as if I process a 500 unit batch. All the same steps of the QC QA process are there. All the same steps of our intake team are there. And so we really started focusing on brands that we think have the longevity to stick around. We've done countless projects with with smaller brands and it always ends up with somebody being unhappy. So we really tried focusing on um not necessarily like one specific client but just brands that have already been around for a while and uh have the ability to pay their bills that's super important. Um and really just it's not like I don't want to do small brands it's just I've kind of seen the same story unfold multiple times where they'll actually place fairly large orders for their first uh batch um and they're very very optimistic on how much they're going to be able to sell and so you know if I have to allocate 10 to 15% of my production because they think they're gonna sell 1000 units in the first month it's tough because I know they're not I know what I sell um I know what some of these other brands sell and somebody new coming in is a very low percentage that they will get anywhere near that. And uh typically they end up getting upset at us at the end of like oh well we can't continue because we're still sitting on 90% of the inventory uh can you give us a discount or this or that? And it's it it just gets to the point where it's not really worth the hassle. So um you know there's also not much you know if I order something from China and I only order a hundred of them it's very expensive. If I order a hundred thousand I get the I get a good discount. There's not much of that on the on the concentrate side there's there's still enough competitors to where they're just trying to make payroll they will sell stuff at a loss. And so as that goes away and again to to some earlier points as the you know companies that really try to protect their margin are um the ones left standing there's gonna be less variance on pricing and stuff. And I think that'll allow our customer concentration to decrease a a little bit and we won't be so uh dependent on a couple big clients but for now um I rather do our best to keep those clients happy uh rather than you know be super distracted doing a bunch of small projects.

The Discipline Of Saying No

Ben Larson 32:11

Yeah. John I I there's so many parallels between your business and ours I I have just like a load of questions that are piling up in my head. But something I've all often thought about ever since becoming a professional out of school was the the art of saying no. And it sounds like you do that quite a bit you say no to customers that are too small or that you know are going to cause inefficiencies in your operations. You say no to big business because of capacity like how do you think about that and how do you train the team on properly doing that so that you maintain your your kind of um your reputation in the space or or that in the case that they do grow to a certain point that you want them to come back to you and and give you give you a try.

SPEAKER_00 32:57

Yeah so there's a inside joke at my company um I'm called no deal because I shoot a lot of stuff down. You know I again I'm very protective of our margin uh it takes especially on like the retail side because every time you it every time you grow it just takes it's so long for the capital to come back that you you will quickly exhaust your your resources if you are not really intentional about uh protecting you know that Argent um I I think that I rather say no to someone because I I know I can't provide the service than try and fail. And again I think that's one of the reasons why a lot of uh these companies that may leave to go try something else out end up coming back. Um and we hear the same thing over and over again is like oh my gosh your team is so great you know and again I have to really give credit to to my my team members they're they're doing such a great job they all really care a lot um they really try to be as a an example of the industry of how like like professionalism should be um you know I think we have a unique blend of of most of our people were in cannabis it's in some fashion before legalization or at least dabbling in it. And then we have a couple professionals that had no you know no cannabis experience and I think it makes a you know a good mix of individuals I I don't think that you have to be a hundred percent legacy to be successful. Actually I think it probably is will hinder quite a few aspects but I also think that without having some underlying understanding of where this industry started how it got to where it is I think that you can have all the capital in the world and you know you see it very so often with some of these MSOs where they they're almost soulless. And unfortunately I think it's all going to change in the next few years where you know it's just access to capital is going to be chain one second. Can you sorry guys I don't have a I don't have a lock on my door unfortunately open door policy open door it's very it's very open door.

AnnaRae Grabstein 35:32

So since you've brought up protecting margins twice I think at least since we've started talking I like to ask the the direct question which is so what is the margin that you're targeting and how are you protecting that? What does that look like?

SPEAKER_00 35:46

So I should for a 50% gross margin. And honestly most of the time I try to add in marketing sales and distribution into that to where like after all that it's 50% fully loaded. Yeah.

AnnaRae Grabstein 36:02

So it's more of like a fully loaded not not a gross margin.

SPEAKER_00 36:05

Yeah it's not quite net like you know insurance and some stuff isn't in that but I I try to do it because there is quite a bit of variability between uh you know biomass and and time of year. And so like summer months uh material scarce so our our cogs are a little bit higher in those months and then come winter we're able to get you know better margins. And it's been one of the reasons that we've been able to scale um because we're able to reinvest that money in into to growing um again you can get a cheaper product at least on the wholesale side from from one of our competitors um but a lot of times they're not our competitors for very long there's a handful of us that have stuck it through and um you know I think also because we do our own distribution and we do our own sales it's allowed us to control those margins a little bit better um and keep our keep our costs down um and and again be agile which has also been really important for us. So yeah we shoot for 50% sometimes it's 40 sometimes it's 60 but for the most part I would say it ends up being very close to 50. Yeah.

Customer Truths And Retail Gatekeepers

Ben Larson 37:26

So we've talked a lot about operational efficiency and gross margin and and that kind of stuff will very much help you keep your business alive. But throughout the conversations that we've had and and when we connected last time uh you seem to have a really keen focus also on the customer and what the customer is looking for. And again having this diverse business you know customer could be customers could be looking for operational efficiency or maybe it's the the focus on on quality and and you know the all the things that you're doing on the regulatory side but then you also have this kind of retail brand. So if you can kind of like boil down simplistically like how is it that you think about the customer when you're designing the various aspects of your business?

SPEAKER_00 38:14

Sure. Well for us we have multiple customers right we have our wholesale and white label clients which are our customers and then for our retail end uh is even more complicated because the retails are our customer but they're not our end customer. It's the person that buys from a retail um so that and that can get very complicated because as a brand you never own any of those customers the retail owns those customers um so I think most of our customers on the the manufacturing side because we're using their inputs they know what their inputs make if they've used another manufacturer or with us. So it's it's less on the quality because that's dictated by the starting material and more so on the consistency. You know, being able to consistently provide the products that they need in a timely manner and like meet deadlines and schedules I think is really what's sets us apart. As far as the retail end customer, I mean I'm still trying to figure that out because again we don't have you know it was a lot easier for me in the 215 days. I was at a table every two times a week and I got to interact with the customers I got to see what they liked what they didn't like. You know now we have to go through so many different filters you know the buyer is most of the today is like oh all BHO is bad all solvent list is good. And that actually gets perpetrated down to the end customer. And so it can be really hard. But then I'll see in my sales that you know hydrocarbon is still 60 70% of our of our retail revenue. So it it can get a little muddled when you're you're listening to again these these buyers that aren't really they're not your customer they're your gatekeeper. They the ones that decide whether you get to even see the customer so I think uh it's a it's a tough balance um and I will say that as consolidation on the retail space has happened it's gotten a lot better because there's just less buyers to deal with and so you build relationships with some of the bigger groups and it's it's a lot more of a of a symbiotic relationship whereas before it was just like what can you do for me? How cheap can you get it to me for how many free promo units are you going to give me um so yeah I would say that that's really been our uh you know our focus for customer has just really been consistency.

Ben Larson 40:54

And and just one quick follow-on question because before we hopped on you were talking about not being the you yourself not being the customer. And I think that's really important for companies to hear.

SPEAKER_00 41:06

So can you talk a little bit about what you meant by that we have this conversation all the time when we're trying to decide hey does this flavor work for our vapes um and so we will sometimes be completely split 50-50 to you know some of us love it some of us hate it. Nine times out of 10 as long as half of us agree on it it ends up doing really well because in the retail market the majority of end users are not super connoisseurs. A lot of those super connoisseurs still get all of their product from the traditional market um you know they're don't want to pay the taxes or overprice on products um so we we end up with this battle of like I will send out products to uh some product testers that are more so on the connoisseur side and they'll be so highly critical and you know I'm comparing it to other brands that I've made stuff for and I'm like well this is significantly better than some of these other products like it should do you know it should do well um but then you have people telling you like oh no I wouldn't I wouldn't smoke this and you end up being quite surprised when it flies off the shelves so it's again uh with the retailer controlling the customer and they're all very uh you know hush hush about you know good luck getting an email list good luck getting anything you know actually have to shout out embark on this uh they are probably one of the few stores if not the only store that gives us like an amazing data set behind everything who our average customer is what they purchase what else they purchase with it um and that's been able to that's allowed us to you know kind of refine our offerings that we that we put in their stores um so yeah not being directly linked with our customers makes it kind of a guessing game so John I know you have a bit of a contrarian pin perspective as it comes to schedule three and 280e and how um some of the potential federal policy change might affect the industry, your business uh before we get into that in particular I think it's also um interesting to to hear you talk about how you're so focused on getting to 100 million in California particularly knowing that so many other states are

Schedule III Worries And State Plans

SPEAKER_00 43:50

selling um extract for 5x 10x sometimes the um the wholesale cost that California manufacturers are able

AnnaRae Grabstein 44:00

Sell it for because of lack of supply. And uh so I have assumed that an extractor like you would be looking at the potential opportunity with federal policy change as a exciting potential opportunity. Uh, but I know that you see it different, so I wanted to give you some space to talk about that.

SPEAKER_00 44:23

Sure. So on the other state part of the question, um building out extraction labs is not cheap. It's quite a bit of capital expenditure. And I've always held the stance of once there is some kind of semblance of full legalization, whether that's interstate, I can ship out of country. Um I can make almost every gram of concentrate I need to out of our facility once we're fully built out. I don't need to have a lab in every state. Um, and you know, I think that's where some of these big MSOs have gotten themselves into trouble, is you know, they're in 22 states, they gotta build out, they build out 22 labs the same exact way. And it's, you know, the market demands are completely different. Um, you know, you touched on concentrates being more expensive in certain states, but they also cost significantly more to make. So because there's less uh input materials, yeah, you may be able to get $20 for a gram instead of three to five wholesale out here, but the input cost is also 10x what it is out here, and the quality still isn't there. So that's been um our main reason for not going into other states is we weren't we were not confident that we would be able to produce the same level of quality in other states. Um now I think there's a couple states uh that are starting to get attractive as far as you know, uh I think Missouri has a lot of real potential. Um, I think New York is still a couple years away from being attractive. I would love to go out to Florida, um, but right now we are in uh kind of a holding pattern until there's some kind of clarity around what's gonna happen. You know, are is schedule three going to overrule states' rights, right? So like does adult use go away? If if only medical is allowed for schedule three, what does that mean for adult use markets? Um now I've thought of some very creative ways that this could turn into a positive where um you know it's just gonna come on the retailers to convert all their rec users into medical users at the cheapest way possible. Um, and I think there's some creative ways that they can do that. Um but being in the 215 market, watching what happened after Prop 64, seeing how every state has kind of handled legalization slightly differently. And there's I really don't think that there's any one state you can point to that was that you can be like, see, they did it correctly. Um everyone has its its own issues. Um so we're just waiting for clarity. As soon as I I I know, like, hey, like we didn't apply for the DEA license. Uh our our general counsel was like, I can't see one good idea, one good reason to do this. Um now there's quite a few different opinions on that. Um, and so we'll have to wait and see whether that was the right decision or not. Um doesn't mean we can't apply later, but I am a little pessimistic on how all of this is gonna unfold. And so I rather focus on California, be super strong here, build up our our war chest so that we're able to kind of handle whatever is thrown at us. Um and again, if interstate commerce is allowed, I don't need to add a lab in every state. And we have tried doing some like licensing deals in other states. And I have this one example in New York where we offered, like, in my mind, the most sweetheart deal to this group. Um it was like, hey, we'll we'll run your facility, I'll set it all up, I'll provide all the SOPs. I just want 10% of revenue. And they were like, that is absolutely insane. Um and I was like, okay, well, I like I think that's a no deal deal. Um I'm like, so you know, you're gonna struggle, you're gonna come back to me in a year or two, and I'm telling you it'll be 20% then. And sure enough, two years went by. I got the phone call. Hey, you know, do you think you would honor that 10%? And I was like, absolutely not. Uh, I had no leverage during that time. We were still really bootstrapped. I was just trying to scrounge extra ways to build to to bring in some extra money. I was like, but now I don't need to distract my team. I'd rather for personally, I'd rather not do it. But if I'm gonna do it, like this is this is the new, this is the new price. Um so I know that there's like some of the brands that we even work with are really good at the licensing model. You know, they've really just turned into marketing companies. You know, they go to a top manufacturer in each state, provide their SOPs and formulations and packaging, and they kind of just turn into a sales arm, and they've been uh, you know, very successful doing that. So yeah.

Why 280E Ending Could Get Brutal

Ben Larson 49:59

John, I actually uh appreciate your kind of skepticism in kind of the whole context of all the conversations that we've been having, even just last week. Um and I'm I'm I want to like double click a little bit more on on kind of the downsides you're you're seeing of this kind of potential shift to to schedule three. And something we talked about uh in our prep call was around the the 280e uh impact and what happens when 280e goes away and how that kind of debases everything.

SPEAKER_00 50:32

So I definitely have a uh probably uh an opposite opinion of 90% of the people out there. Like, yes, tax reform is great. People being able to write off normal deductions and and uh I I think that is a good thing, but I think there are unintended consequences that smaller uh bootstrapped companies need to be very aware of. So one of the reasons, as I mentioned earlier, that we've been so successful this year is the capital dried up. So now only people that are that are running a profitable business are really able to continue to grow and continue to scale. So when 280E goes away, the Amazon model comes back. And a lot of people tried that in 2019 and 2020, and it worked very well for them, even with the not being able to take deductions. They grabbed so much market share and all of this, and then when they couldn't do their Series C or Series D rounds because there was no one, no money left, um, they disappeared. So now that if if you can write everything off and you can have losses for the next 10 years, and you're let's say you're a private office or a family office and you're like getting into cannabis and you have a bunch of other businesses that are very profitable, you can decide, hey, I'm gonna put a big chunk of money into cannabis. I am going to take market share at all costs, and if I lose $100 million a year, that's great. I'm gonna I'm gonna offset it against all my profit, profitable other businesses. Um, and I think that that is going to be very difficult for us small smaller producers that don't have capital because we will have to weather out the storm and we're gonna have to stand out in different ways to keep our customers because at the end of the day, I can provide the best service, I can uh have great relationships.

AnnaRae Grabstein 52:34

But if a new company comes in and they're a third of the price of me, like it's But John, don't you think the investors learned their lesson back back then when the capital did dry up? And if the capital comes back to the industry, they'll be more interested in acquiring you than competing with you.

SPEAKER_00 52:55

I think it's very hard to build a true moat in cannabis right now. Um and as much as I would love to say, like this is a as something I I get into little disagreements with some of my business partners, is you know, if I had all the money in the world and could start right now, especially with what I know, I could be 10 it would be devastating for a lot of people that have been in it. And so I think some of these people will be able to buy talent. Um, and I think earlier on it was a lot harder to buy talent because there just wasn't as much out there. But now that people have close to a decade of of you know regulated cannabis experience, whether they started in Colorado or Washington, I think that you can assemble a dream the dream team. And there's uh what is it, Vireo? I think they're making a pretty big, some pretty big noise in the industry. And they're they are buying up smaller, successful, profitable businesses or distressed assets. It seems to be one or the other. Um, and so I do think there will be um a few companies that are snatched up, but I think you have to be at a certain scale. Otherwise, it's it's and that's why we're super focused on California because it seems to be a market that a lot of the bigger uh MSOs they just want to stay away from. So I think that's where we might have some competitive advantage when it comes to acquisitions. Of hey, you guys aren't even in California. Bring, you know, let's let's join forces, and now you have access to a uh uh five billion dollar a year market, should be probably closer to 10 if they figured out how to regulate it, like uh get rid of some of the uh non non-licensed activities. But yeah, I I just am very I I don't think any of us even have seen a fraction of what is to come when there is federal legalization or even schedule three, I think it's gonna really open up the floodgates and capital again. And I don't think certain investors have learned, but there's plenty of people that sat on the sidelines because um maybe they weren't allowed to invest in cannabis because of it being schedule one. And I think those people will be a little bit more optimistic and they can say, Oh, I can learn from all the failed experiences of the past of all these of all my peers that did it, and I heard all the war stories, and uh I can I can make sure I don't make those same mistakes. Um and so I yeah, I'm just uh I don't want to be a pessimist, but I try to be at least a realist. There's going to be uh I think it'll be a significantly more challenging in the next two to five years than it when then the start of the industry was.

Leadership Growth And Letting Go

Ben Larson 56:03

Yeah. As California operators, I think we know what it's like to deal with a singular state level agency, um, namely the DCC here here in California. Um what we aren't all aware of is what it's like to interact with the FDA or the TTB or whoever else gets gets involved or gets to get involved. And so um I again I appreciate it. But I want to end kind of on a on a high note and kind of getting into your to your uh psych psychology around leadership here. Um you have had this pretty awesome growth growth curve, especially kind of later in the business and going from you know somewhere around 100 employees towards 200 employees. You know, how does that change your day-to-day? Like how much of your time are you you spending on kind of like team dynamics and hiring and and that kind of stuff? Um, and how do you anticipate it changing in in the year to come?

SPEAKER_00 56:57

So I'm actually going through almost an identity crisis right now because our business is totally like, I would say we have slowly moved out of the startup phase and more into like the growth phase. And that is new for me. I've never run a business this size before. So um you combine that with like an imposter syndrome where you're just like, am I even the right person to do this? Um, but I find myself now like, what should I be doing? Um, because it used to just be solely reactionary. Like, oh my gosh, power went out on this half of the building. Like, I'm gonna put my electrician hat on today, or oh, the toilets are clogged. I need to be a plumber today. Um, and now it's really about building a team that can do those things. Um, and I think what's been really rewarding to see is I I used to be a very big micromanager. Like a decision didn't get made unless I made it. And I started realizing that if I don't allow my team to make mistakes, as long as they're not going to be like the end of the company, like I kind of have to let them do it. And I realized it's like no one told me whether I could do something or not. So I got to learn those mistakes on my own. And that's kind of how I was able to grow as a person. And so once I kind of let go of um micromanaging everybody and turn and really move to, hey, I'm gonna trust that the decision you're making is good enough. And if it's not, you're gonna learn from it and you're not gonna do it again. And I think that's what's really allowed us to scale. I have to give a huge shout out to our HR person, Dean. Um, he's was one of our best additions we've ever, ever had. And I think um a solid HR person can be make or break for a company. Um, I mean, those were a lot of fires that I was trying to put out that I really did not have the experience or was equipped properly to handle. And he's been absolutely great. And um, you know, now that as I mentioned, I'm kind of having a mini identity crisis. Um, now I'm kind of moving more into, you know, back into relationships, going out and and and meeting up with our our larger, our larger clients and and just solidifying those relationships. Um, and then looking at the the future, what are we planning, trying to stay as caught up as I possibly can on regulations changes. I know you had mentioned earlier uh about the packaging changes. I actually just got that email from my general counsel, I think on Friday, and that's what I'll be digging into this week because you know there's been all sorts of marketing restrictions since we started. It just seems like they're definitely cracking down a little bit more. So now I have to go through and you know, we got in trouble because a brand we worked with has the name organic in their logo, and the DCC did not like that. And we have been using this logo on our packaging for five years, never had an issue, and then all of a sudden it turned into an issue. So yeah, I think those are the the kind of the learning experiences I'm facing as we as we jump from a smaller company into more of a mid-sized, uh grown focused company.

Ben Larson 1:00:39

Well, and I I love that, and I love it for all the HR professionals out there because it's not that often that an HR professional gets a shout-out on a podcast. So there you go, folks.

Last Call Plus Closing And Event Tease

AnnaRae Grabstein 1:00:50

Amazing. Um, John, you've been really transparent, and I think people are gonna learn a lot from this conversation. Um, it's time for our last call, which is your opportunity to leave a final message with our listeners, advice, call to action, or a closing thought. So, what's your last call?

SPEAKER_00 1:01:07

So, my last call is as I mentioned earlier, we were a little late to the vape party. Um, but I think what we have been able to put out in the last eight months is an amazing, an amazing product. And so if you're a vape consumer and you're looking for not a distillate-based vape, but a true live resin, full spectrum uh vape that's gonna give you both a really balanced high, but also an uh amazing flavor experience. I would just say give it a shot. Um, I know we're new to the scene. We're, you know, I think we're number 50 or something in in terms of revenue for that SKU, but we are growing very, very fast with it, and we've had nothing but great reviews, which is awesome because we have tried launching some all-in-ones in the past that did not go over well at all due to some hardware issues. And so, um, you know, if you have had any of our products through any of the other brands that we manufacture for, and they all say, you know, manufactured by Big Oil somewhere on the packaging. So maybe you've seen it, maybe you haven't. But um, you know, I would say give our product a shot. I think you'll be pleasantly surprised. And, you know, I am very active on social media. If anybody loves it, hates it, wants to complain, wants to, you know, try something even, just reach out to me. Um I love talking with everyone. I probably like talking a little bit too much. Um, and yeah, that's really it. I think that's the the main thing that we're focused on for the next uh 12 to 18 months is just building that SKU out as much as possible since the market size is just seven, eight times what dabblable concentrates are. So I think that gives us the most uh the most room to hit our ambitious goal of 100 million by the end of 2028. And um, I think will be probably the driving factor in helping us get there.

Ben Larson 1:03:21

All right. Well, we're we're on a run of successful predictions. You this will be the number two, 100 million by the end of 2028. There you have it, folks. John Lafata, the CEO and co-founder of Big Oil Company. Go pick out if you're in the California market, uh Bear Labs on the front of the label or Big Oil Company on the back of the label. But John, thank you so much for spending the last hour with us. It was it was really great. Thank you guys for having me. Amazing. All right, folks, and thank you to you for listening and watching and supporting us. We have a big event. It's our annual event, fourth annual coming up uh at MJ Biz this year in Vegas. Keep your ear out for it. If you're not on the invite list, sorry. Uh thank you to our teams at Virtosa and Wolfmeyer, and to our producer, Eric Rossetti. If you've enjoyed this episode, please share, like, review, do all the things wherever you listen to your podcast. Thank you, thank you, thank you. As always, folks, stay curious, stay informed, and most importantly, keep your spirits high. Until next time, that's the show.