In the last year, one of the companies I was really disappointed in for a long time was CannaStrips, AKA Lifestyle Delivery Systems (LDS.C).
The company was promised as this ‘never to raise money again, bringing in more financing than we can handle, investors fighting with brokers over who’ll get some and who won’t’ deal that, at the time, sounded like one for the ages.
It wasn’t. It hit the markets and dove down hard. There were no keen investors desperate to get the free trading stock. There was no $5 million on the book for a $500k raise. There was no revenue. A lot of people lost money, myself included, and a lot of financing guys hid their heads for a while.
But time can heal wounds, or at least give a company time to pivot, reconvene, streamline, atone and correct. This Christmas, we reached out to a few companies that had disappointed us and gave the CEOs a chance to explain just what happened.
LDS is one of them.
And so it was that CEO Brad Eckenweiler came to the Equity.Guru offices and faced harsh questions. In person. Happily.
“I thank you for your indulgence,” he said, “I know we’ve had a long road and disappointed you.”
Fair way to kick things off. I make my living beating on companies that I think deserve it, and I think it’s important to do that so people know you’re not writing advertorials. Lifestyle Delivery Systems was a client of mine. And I booted them around, despite that fact, because the company warranted a booting for a long time. Promises were made and not delivered on. Milestones were missed. The business plan abandoned and altered.
Did it still warrant that reputation? I asked Eckenweiler to explain the company’s prickly debut.
“Part of it was the licensing plans we had,” he said. “Once California decided they were going to vote on actual real marijuana commercial licensing, with no more grey market material, if we’d gone ahead with producing where we were when we listed, we would have violated our opportunity to get a legal license in the state, so we sat on our hands until we got a license, then permits, then submitted both to get a Condition Use Permit (CUP). By November of this year, we had two of those, but the market had expected revenues a year earlier, when we had hoped to license our tech to others in the grey space. Doing it right added a year to our lives, which was obviously extremely frustrating to everyone, but once we had the CUP, it was obvious we were going to be able to produce and in large quantities.”
When pressed to go back deeper, Eckenweiler responded, “The cannabis space was just unclear. We were grappling with an environment that was in a state of flux at best. I was trying to keep company shareholders at a safe distance from legal trouble and accomplish our goal. The tech side was advancing quickly, but it was hard to harness the benefits for us through tiering of licenses, etc. You start to lose control over production, etc. when you’re doing licensing deals with other parties. You’re at the mercy of whatever’s in writing, and whatever they decide to do with your brand. Being hands on is always better, so we moved away from the grey market and focused on doing it right, even if that was going to take longer.”
He continued, “It was convoluted. I knew we were on the right path and regulatory changes have made the path clearer. It just took more set-up time, but now there’s more profitability at the other end. We’re really focused on creating a product we can make at a price everyone can afford.”
LDS long had a stigma attached to it. Supporters of the stock, back when it was circling the drain at $0.10, would start their defense with, “Yes, it was a mess, but…”
Eckenweiler doesn’t think that stigma is still an issue.
“No, I don’t think there’s stigma, it seems more like people just want to see revenue. Once we can show that, that’s going to be the focus going forward, not what happened to the stock in late 2015.”
Indeed, LDS naysayers have made money off it regardless, myself included. When it shifted from $0.15 up to $0.30 and people asked what I thought about it, I dismissed the rise as “typical Vancouverism”… a handful of people buy a stock that’s been hurt for a while, a handful of others see the move and jump in expecting big things, and it goes up and up.. for a while.
When LDS hit $0.45 though, even I took a bite. It just didn’t seem it wanted to stop, or slow, or that anyone had any doubt it would keep rising. I sold at $0.70. It went to $0.90, though has come back to around $0.50 since.
Meanwhile, Eckenweiler , suitably humbled from a long period before that spent scraping the bottom financially, was now doing the work required to cleaning up the scene.
“We had a 50% deal in the city of Coachella with Cultivation Technologies to establish a permitted manufacturing facility, but they have not even broken ground on that project, so we wont do that. Adelanto was issuing permits, so we met a company out there that had permits on a building and instead of $2 per sq ft of construction, we could get 69c, and a 75-25 deal instead of 50-50.”
The market hates a walk-back, but Eckenweiler explained the deal made prudent sense, and was evidence not of corporate flakiness, but a more responsible path.
“We’re waiting for California regulations to come out before we make this deal definitive. That said, we have equipment wrapped in cellophane while walls go up. You see, the State of California changed laws allowing for volatile extraction, and we were obligated to include an explosion proof extraction rim in the plans which must be approved by the fire department. It’s more expensive than we had initially anticipated, but that’s only about 400 square feet of what we’re doing. In the meantime, we’re actively building out so we’re ready to do business on day one.”
According to Eckenweiler, extraction equipment will be arriving in pieces next week at Adelanto, so LDS can generate formula samples and send out a few thousand testers to dispensaries to talk up with their clients.
Let’s be clear: I’ve been hard on this company, and for good reason, and Eckenweiler hasn’t always delivered on his promises, but a grown-up approach to this opportunity is FAR more interesting than the initial plan, which sought to shimmy around regulations with a routine whereby the company would license the packaging to marijuana players who could then use their machine for free. By selling the packaging and not the weed strips, the company figured it would be insulated from the feds kicking in their door.
This plan, of actually having licenses and partners and permits, is better. And Eckenweiler sitting forward in his seat, explaining details of the finer points of California licensing regulations and Nevada possibilities going forward, is a far sight better than the Eckenweiler of late 2015, when everyone was telling him how great his plan was going to be and waving fat cheques, and victory was considered a fait acompli.
You never know what’s going to happen when someone comes out with a mea culpa. Most CEOs would rather cut off their lead golf swing arm than apologize to shareholders or even admit they’d made errors in judgment.
Eckenweiler, however, is taking his hits and standing.
I didn’t think he’d make it this far. At several points through 2016, LDS was out of cash and raising ‘keep the lights on’ financings, betraying that promise that they’d ‘never raise another dime’ after that first pre-listing raise. I won’t say I had the epitaph written, but I considered it likely that some big player would move execs about before long.
Instead, the market rallied. And, interestingly enough, it wasn’t the market driving LDS up. LDS was well on its way before the market caught on.
The reason? CannaStrips are a fucking good idea. Also, everyone wants assets in California. But mostly, we all want CannaStrips to exist. It’s why we bought into the company in the first place.
So where is production? It’s coming, says Eckenweiler. And it’ll be better than the first batch, because tech.
“Let’s discuss the primary challenge of pharma strips,” he says. “Saliva. It just gets in the way. Saliva in the mouth is a natural barrier to anything getting into the bloodstream through the mucal membrane. There is a component in LDS’ formula now, that allows materials to transfer into the bloodstream much easier – 400-500% better. That’s a better bio-availability to the blood stream that any pharma strip currently on the market.”
This is a MAJORLY important thing. Because anyone who has taken an edible has experienced the situation where, dammit, this thing isn’t working. So maybe you take another. And another. And then your head melts and you’re useless to anyone for the next two days.
Better access to the bloodstream means CannaStrips can deliver their payload quickly, far lessening the likelihood of an overdosing experience.
For guys like me, who might like to get his CBDs in before bed, or get stoned occasionally but not want to make myself a puddle on the floor, this is next level stuff. Adults need proper and consistent dosage, fast acting chemistry, and a reaction that keeps our jobs the next day.
Regarding proper dosing, LDS has been busy. The company has developed tech that allows it to keep active molecules a given distance from one another on the strip. Why this is important is, according to the CEO, the good stuff on the strip tends to want to come together, which is why sometimes you’ll eat a hash cookie that does nothing for you, and sometimes you’ll eat one that turns you into Dom Deluise, circa Cannonball Run.
On a strip, that would mean you might get all the active ingredient on one corner, and none on the rest. The new tech, instead, makes the dosage uniform across the strip, which means you’ll be able to cut it in half if you want a half dose. Eckenweiler says perforated strips are coming to make this even easier.
Again, this will be big for adults, and seniors especially, who are a huge potential market, but which you don’t want to cause distress to by making the walls melt.
“Our plan is to go to clinical trials to get insight into what we call the chaperone effect,” says Eckenweiler. “Our team believes they can target certain areas of the brain for pain, creativity, and the like, and direct much of the material to that area. Admittedly it’s still theoretical at this point, but we think it’s solid science. The intention is to have these trials in Canada in the first quarter of fiscal 2017.”
One of the issues that caused consternation early was the number of investors who believed LDS had patented the machinery to make these strips, giving them no competitors and a big licensing opportunity.
That’s not the case. In fact, the machinery to make strips is fairly commonplace.
Eckenweiler clarified, “We’ve modified the machine to fit our purposes, but certainly there are companies that could build that machine. The machine itself is not as important as the formula. If someone wants to spend a few million for a machine for an imperfect product, they could. Packaging is off the shelf; our formula is where the value lies. If you don’t have the formula, you only have an edible. You are only going to get half the effect, and it’ll be 20 minutes to an hour before it hits. It would be a little difficult to adjust dosing in that amount of time. I think we’re pretty strong.”
Indeed, there are competitors out there. Kinda.
“People are making strips but, basically, they are a fruit roll-up,” says the CEO. “If anyone is using anything close to LDS’s formula, they’re violating the company’s patent. Plus, most of these hand built offerings are fairly expensive, around $6 to $8 per strip. Tommy Chong sells strips at $10 per.”
The other reason he’s not worried about competition is, he doesn’t think the competition will be able to compete with his manufacturing price.
“Wholesale , we’re selling them for a dollar per strip. That should likely come down. LDS wants the consumer to buy it for a dollar. If the company gets to production capacity of more than a million strips, we can make that happen.”
That capacity won’t kill them.
Eckenweiler stressed, “If my margins were 200% at 50c, why wouldn’t I be happy. I don’t want there to be a decision. I don’t want someone to leave a dispensary haggling over price. Smoking regulations don’t let you get within 1000 feet of some places, so strips will create a much-needed alternative to smoking and we want everyone to see them as a reasonable, effective, obvious choice.”
Because there don’t seem to be a lot of companies seeking extraction licenses in California, LDS has also opened themselves to more opportunities as a third-party extractor. As such, the company is prepping for the eventuality of contract work in that area, but it doesn’t need that work to get profitable.
Eckenweiler says there won’t be much overhead at LDS, as the company is working to automate much of what they do. To that, he doesn’t think LDS will ever have more than a dozen employees , which means producing and selling between 100k-200k strips per month should cover the entire production costs. Currently, their equipment can produce half a million strips in ten hours.
To produce more will not significantly increase their costs beyond the raw materials. No extra staffing needed, no more licenses needed, no more space needed.
“Just think,” says Eckenweiler, “In one shift LDS will be able to make the numbers it needs for a profitable 1st quarter, and then send everyone on holidays.”
Because of that, he’s setting revenue projections starting at $100k per month, and doubling each month thereafter. That’s conservative, he says, though he also admits it sounds a little ridiculous. Eckenweiler is comfortable with that number and feels it will puts LDS in the black by the end of Q1.
“Comfortably,” he says.
I’m wary of any statement that unnecessarily pumps this deal, because it started with such statements eighteen months ago, but Eckenweiler says folks will be seeing runs on the board in the weeks ahead.
Though, the CEO says, he’s not ruling out delays. After all, the sunny state is kind of stuck in their history of 25 years plus of illegal production, and votes not withstanding, it takes time to get regulators to catch up to reality.
“The people producing marijuana products in California are still not pursuing licenses,” he says. “They don’t seem to understand there’s a change coming, but having met with people in government in Sacramento, I’m fully certain there’s a change coming and, if you’re not paying taxes to the government, you won’t be in business soon. Right now, we have what we need to do legal business while making revenues and paying taxes, so we’re on the right side of the regulators. Beyond that, if we felt we needed to grow farther, we would function as a nursery to control genetics, then take our seedlings, give them to growers and buy back the resulting mature plant.”
Wait: Farming out your own seedlings? Why?
“You have to realize that California’s canopy is limited to 22,000 square feet per grow op,” he says. “The state doesn’t want big producers and big corporations in this business, they want it shared around. So if LDS builds the genetics and guarantees a buyback, our third-party LPs won’t have to worry about what they’re growing or who they’re selling it to, they just grow what we ask and can budget what they’ll make off that.”
McDonalds buys its lettuce the same way. They don’t grow it themselves, they tell others what to grow and leave the business of making it happen to others. ‘Just gimme the end product and keep it standardized.’
And it kind of has to be that way for weed.
“A new cookie company isn’t going to go out to grow their own wheat and sugar cane, but the world of legalized cannabis is a different thing all together. You have hit and miss quality with little or no control over process. As far as LDS is concerned, wanting to produce something to truly pharma grade doesn’t allow for variation in the product from point of cultivation. We’re not interested in getting into bulk cultivation, so we’ll let others do the heavy lifting. If the company can put this program into effect, it’s going to split the market wide open. CannaStrips will allow the industry to finally move beyond its stoner stigma.”
And that’s important going forward, because CannaStrips are perfect for seniors. In fact, it’s the sweet spot for Eckenweiler.
“We’ve been getting significant feedback from seniors who were only getting a few hours’ sleep a night uninterrupted before they began using our strips. Seniors are supportive as anyone because they can finally get a full night’s sleep with no hangover effect. One of the construction guys on site tried the Black Mamba. He had broken his back in four places falling off a scaffold four years back. Now he’s off Oxycontin. We really love the feedback, though it doesn’t work for everyone the same way. For those it does, it saves on costs from opioids and gets a better effect.”
LDS is also looking at Las Vegas. It’s been contacted by companies in Las Vegas as well as the City itself showing interest in their tech, says Eckenweiler.
“It would be a great venue, it’s a relatively contained environment and it would be easy to manage. The city is also a world-renowned vacation destination. Think about the amount of product that would successfully move… it would be mind-boggling. We’re talking about casinos and hotels, that don’t want tourists coming and stinking up a room, or having an overdose situation. There are no residency rules in Nevada, so we can do business there without needing to cross borders with product. The Oakland Raiders are going there, hockey’s in there now… All of this fits LDS’ model well. “
That said, there’s still risk.
“The regulatory risk will still exist until the federal government reschedules cannabis from its current level. This will probably happen some time soon. Medical marijuana is starting to cost Big Pharma billions of dollars, so pharma will continue to lobby against weed, but there’s no way to predict just exactly when the tide will turn,” he says.
“Ultimately,” he says, “once the ball rolls down the hill far enough, you’re not going to stop it. Cannabis continues to pick up momentum and support. 27 states are now moving forward with , which is 54 US senators against 46, and they decide what the laws will be. Even states that didn’t make it happen this time around, like Arizona, weren’t that far away from giving it a nod. Florida, which a few years ago, didn’t pass, did easily this time. A recent Rand think tank study showed marijuana approval across 18 years old to 88 years old. There was not more than 4-5 % difference between those numbers when it was expected to be skewed much higher toward the younger demographic.”
So what can users expect from a CannaStrip? That’s a moving target right now, and depends on preferences.
“Extractions of cannabis oils and their compounds are in a nascent stage,” says Eckenweiler. “There’s not a lot known about the connectivity between terpenes, cannabionoids, and flavonoids, so LDS is leaving the whole plant intentionally in its Black Mamba formula extraction.”
Which means it may work well, but, “it’s going to taste a little earthy,” says the boss. “For others, we’re taking flavonoids out, so it starts as water basically. Then they might add acai berry to play with it, basically like adding a drop of flavor into a glass of water. There you go, now it’s acceptable to anyone. LDS won’t go into the candy flavoured space, however.
“We don’t want to go to candy side,” he says. “I do not believe that’s a place for us to be. This has to have a grown-up flavor.”
Which leaves me with one last question: When LDS went from $0.15 to $0.90, a lot of people made money… but now it’s shrunk back some. Did it jump too fast? Did that jump cause more people to question whether the company is more promo than reality?
Eckenweiler is surprisingly but appropriately circumspect.
“Things grew faster than anticipated, it’s true,” he says, “but we also had 4 million warrants exercised, so the company brought in a nice wedge of cash on that rise. That says a lot about our shareholders, the story, and their belief in it. Sure, a lot of people came in at the financing at 18c, and when you double, triple or quadruple, you’re going to take some off the table. But it feels like we’ve consolidated where we are right now, which is a great step up from five months back. Once people can quantify a value, when they see revenues, we’ll know more about where the price should be. Profit is what we’re concentrating on right now. This is where the value is and it’s a real thing we can be properly judged on.”
I’m glad Brad and I had this discussion to close out 2016. I won’t say I’m desperately running out to buy LDS at it’s current price (at this time), but I consider the things that made me so angry at the company to be things in the past, as of now. Eckenweiler will indeed be judged on how quickly and effectively he can get those machine gears turning, and how quickly he’ll hit his $100k per month sales rip.
Everyone gets a redo. This is his. Now it’s in his hands.
FULL DISCLOSURE: Lifestyle Delivery Systems was a marketing client of mine in 2015, and of Stockhouse when I ran editorial there. There is no current commercial relationship with the company now, and it has not paid for this article.