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Recently ranked no. 214 on the Inc. 5000 list of fastest-growing private companies in America, New York-born and New Mexico-based Azuca has also added new products to its offerings since Cannabis Business Executive profiled the company in July of 2022. Azuca’s accomplishments during a difficult time for an industry that is really just getting started suggests a firm grip on the trajectory of this developing market, and prompted a follow-up call with CEO and President Kim Sanchez Rael to get the skinny on her plans for this fast-moving and ambitious company. I first asked here to unpack the company’s growth that led to the Inc. 5000 recognition.
“The Inc 5000 process was really interesting and exciting for us,” said Rael. “Our growth rate for Inc. 5000 over recent years was about 2400 percent annualized, which is really a testament to the scrappy Azuka team. Like all companies in the cannabis sector, we’ve had our ups and downs and our fits and starts, but what we really found was a sweet spot for our partners, and we solve some real problems and do it in a cost-effective and scalable way. I think that’s really been the driver of our growth.”
But she noted that where the company is now and where it is headed remains unalterably tied to its raison dêtre and original inspiration. “Ron Silva, our chef and co-founder, set out to solve this cannabis edibles problem,” she explained. “Ron is a chef in New York, he’s a lifelong lover of cannabis, but he hated edibles. So, this vision formed of having edible cannabis – I now use the term ingestible cannabis, because it’s broader than the way we think of traditional edibles – to have a category that is a predictable dose at whatever level the consumer wants, a small dose or a predictable larger dose, and that tastes great.
“We really solve those problems for consumers,” she continued, “and along the way we also solve some really important problems for manufacturers, because manufacturing with distillate as an extract, or any of the extracts from cannabis, is like trying to cook with tree sap. It’s sticky, it’s hard to measure, and it sticks to everything. Our process basically takes cannabis extracts and converts them into a very easy-to-use input into any manufacturing process. We’ve done a study where we improved the manufacturing waste of the active distillate by 65 percent, so we solve manufacturer’s problems as well.”
Their innovations address other problems unique to this industry. “In cannabis, you have this other really crazy business challenge, which is you can’t move infused product across state lines,” noted Rael. “Very early on, we also set out to solve problems with a business model that enables brands and MSOs to have the same process, the same ingredient, the same outcomes in every single state or every single jurisdiction even though they can’t move infused product across state lines. With our business model, we license our advanced formulations to a brand or manufacturer, and then as part of that license agreement, we sell a precursor ingredient which is not infused that we can ship anywhere in the world.
“What that does is it enables our partners to manufacture at any scale in any jurisdiction, and there are no big equipment costs and no minimum order quantities,” she added. “We wanted to eliminate any financial barriers for brands to adopt these advanced formulations because we believe that consumers deserve the very, very, very best cannabis products that exists on the planet. And what we’ve demonstrated is that we’re the key building block to deliver those products everywhere in the world.”
A World of ACTiVATORs
In order to become that key building block in the industry, Azuca has introduced new products this year that go to the core of its promise to solve problems. “There are the two big innovations that we’ve released commercially this year, the Whole-Plant ACTiVATOR®, and then the RTD, or Ready-to-Drink ACTiVATOR®,” said Rael. “We’re very bullish about the beverage category in cannabis. It’s still relatively small, but we all know that us grownups are used to being in social situations with a beverage in our hand, and I really think that beverages as the category will grow quickly. We have been doing R&D in our lab on ready-to-drink activators for a long time, but we did not want to bring those activators to market until we felt like they were perfected. We checked that box this year.”
The problem to be solved is shelf stability. “As an example,” she added “we recently took 19 different beverages that we bought at retail and put them through a testing protocol. These are brands you would recognize, and of the 19 beverages that we tested – and we’re continuing to test things off the shelf – 70 percent of them were more than 20 percent off of their label in terms of dosing.”
Did they have expiration dates? “They all had sell-by dates,” said Rael. “It’s a little inconsistent whether or not they were printed, but these were all within the manufacturers’ sell-by dates.”
Then the question is, when did the degradation take place, because they might have been 20 percent off when they were bottled. “One of the things that’s happening in the beverage category – and to my understanding, it’s a fairly common practice – is to over-dose a beverage at manufacturing because this degradation in container is a known problem,” replied Rael. “What that means is you can get products that are overdosed at retail, or over time they are way under-dosed, including almost zero milligrams of THC in some of these beverages that we tested that were within their sell-by date.”
She added that the degradation issue is complex. “When you put a cannabinoid into a beverage, there are many variables that determine the manner in which it will degrade over time,” she explained. “What type of processor emulsification did you use to make the cannabinoids water-friendly or hydrophilic (water-soluble is really kind of a misnomer), so how did you treat that cannabis distillate before you even put it in the beverage? That’s one variable, the emulsification process. Another variable is what type of container it is in. Is it made of aluminum, is it glass, is it plastic, is it a Tetra Pak? What’s the liner of that container? Another variable for some processes is once it’s been canned or bottled, has that product been at a consistent temperature, has it been in the back of a truck where it was 120 degrees, or has it been frozen because it was in Minnesota in the middle of the winter?”
It sounded as though the cannabis drinks sector needs to move towards a standardized type of production so that there isn’t this swath of variables in the marketplace, like with sodas or most other types of beverages. “I think the Achilles heel right now of the beverage segment is this wide variability in shelf stability, which means the consumer in the end may or may not be getting a predictable effect from a beverage brand,” agreed Rael. “Our job is to solve that problem, and we’ve done that with this product category called RTD ACTiVATOR®, which follows the same model as our other activators. If you’re a manufacturer, you manage your own manufacturing protocols using our process in our infusion, but you manage it yourself. There are other players in this category that have to come onsite and run the process for you to do high volumes. We stay away from all of that. With our business model, we empower our brand and manufacturing partners to control all of the production themselves, and we think that’s really powerful for customers.
“The read- to-drink activator is specifically designed for manufacturers of a product that is ready to drink for the consumer in its final form,” she added. “Let’s say you want to launch a CBD or THC seltzer brand in any market. You would license our RTD ACTiVATOR® process and use our ingredients to make your ready-to-drink seltzer in whatever markets you want to make it. All of our activators, everything that we sell, can move across state lines.”
Did this explain the company’s growth? Are people ordering more activators because it’s easier for them to use, so they can use them in more markets, or is Azuca also adding more partners? “It’s both,” said Rael, “and I think the big driver is the end consumer. I like to use the dial-up analogy. Why would you use dial-up internet if you can have broadband? Why would a consumer put up with a slow-acting, unpredictable gummy when they can have access to a fast-acting, predictable, great-tasting gummy or other ingestibles? So, part of it is that consumers are recognizing that this is a value-add for their own personal experience, enjoyment, or medical effect.”
It seemed as though Rael was uncannily prescient. I reminded her that 18-months ago she told me that within a couple of years the category of slow onset will be dead. “Well, I hope I’m right about a lot of things,” she said. “The other dynamic that I think is playing out, and you see this in more mature markets, is there’s a transition on the consumer side where a couple of years ago, the highest percentage of consumers were 21 to 25-year-olds. But if you look at more recent data based on a study out of Michigan, the percentage of consumers who are in the 55-plus category is growing as a relative percentage of consumers in mature markets.
“I’m 58, and I personally believe that trend is going to continue as we deliver to consumers these familiar helpful product forms,” she added. “And I’m not a smoker, but a microdose beverage is a wonderful product for me and for my cohort. So, I think that as the products mature cannabis manufacturers are appealing to a much broader audience, and an audience that frankly has deeper pockets. So that trend is also playing out and I’m super excited about it.”
Is that a general trend playing out across markets? “My gut feel is yes,” said Rael, “but the only hard data I’ve looked at comparing year-over-year in the age categories was Michigan. But I’m sure that data exists for other markets.”
In terms of individual market penetration, “We’re in 24 or 25 states now,” added Rael. “One data point that I reference is like the old McDonald’s metric of how many billions of Big Macs they sell, and we’ve infused over 300 million servings at this point. So, our formulations have really stood the test of time, the test of scale, and the test of loyalty in the market. Existing customers are ordering more activators, so their volumes are growing, but the number of SKUs we’re in has also continued to grow. At last count, I think we were in over 100 SKUs.”
Is she also seeing new products and more innovation from brands to meet the expanding market demographics? “I see a couple of things,” responded Rael. “From where we sit as a supplier to many brands and manufacturers, 2023 was a hunker down and get through it year. 2022 was very rocky, 2023 was a little more stable, but still a tough year. And what we saw coming into 2023 was some brands and manufacturers were putting new projects on hold. They were like, ‘We just can’t do this right now, we’re not launching these SKUs, we’re going to slow down and survive.
“What we’re seeing this quarter and going into 2024 is the gates are open,” she noted. “We’re seeing higher velocity than we have ever seen in our pipeline, which means, if you think forward six months, that the velocity of new products and new SKUs on the shelf with our new manufacturing partners will I expect be up 30 percent from where we are today.”
Is that an expression of people’s optimism? Isn’t the inability to raise capital still the biggest impediment to business growth for brands? “It’s a huge problem for companies that have to raise capital,” said Rael, “but what we’re seeing is that the companies that have built a business model that is not dependent on external capital markets are thriving and growing off their own fuel. So, it is absolutely an impediment – it’s a tough time in the capital markets in general and for cannabis in particular – but despite that there are brands and manufacturers that are growing.”
A Commitment to Social Equity
I asked Rael about a partnership announced in July with Delaware-based ButACake, whose Hibiscus Elixir is the first product featuring the RTD ACTiVATOR®. Was this the first of similar collabs? “Yes, we have a handful in the pipeline in different markets,” she said enthusiastically. “But there’s something unique about ButACake and CEO Martha Figaro. We expanded our social equity initiatives and created a social equity Fellow Program, and we were so impressed with Martha, with her entrepreneurship and her commitment and innovation in the product category, so we have now made her our first social equity fellow. That means that not only is she a customer and a brand partner, but she also has access to our team for mentorship for business support, and we also have deep discounts of our activator ingredient for our social equity partners, because we want to see more social equity brands get a footing in these markets. So, Martha is really a trailblazer for us.”
With its roots in New York, I wondered what prospects that emerging adult-use market has for Azuca. “New York is so interesting, because our brand is a New York brand, launched out of Ron’s vision,” Rael replied. “But New York has been a very difficult market to do business in. Before New York had adult use, we were working on some medical product launches, and the regulatory constraints were just immovable roadblocks. I’ll give you an example. For a gummy product, they required essentially full pharmaceutical grade processes in the supply chain. We’re a food ingredient, so we just found that to be very difficult, and then as adult-use came online, we’ve seen the same challenges that everybody has. So, we’re poised and excited about New York, but there’s going to have to be some regulatory upgrades.”
Rael is also a policy wonk of sorts. We had not spoken since rescheduling was put back on the table by HHS. I wondered what her reaction was to that move. “I think that rescheduling to Schedule 3 will be an advance for the industry,” she said. “But I don’t think it’s a panacea, and I think the timeline is much longer than most people in the industry have comprehended, unless it’s done by congressional action, and I don’t see that happening. But under the administrative process, there will be multiple years before the rules are written to even enact a Schedule 3, assuming that the DEA approves that and continues to move forward on the administrative path.
“So, I think it’s a positive,” she reiterated. “We all saw a little optimism in the cannabis stocks for a month or so and then that crashed back down, unfortunately. I think the most important thing for the industry at the moment is for operators to have a clear understanding of what are the rules of play. In the regulated state-by-state cannabis market, those are the rules we play by right now.”
There is, however, a big caveat to that with unregulated products increasingly available throughout the country. “The so-called loophole in the Farm Bill has created a significant opportunity on the one hand, but some real risks and challenges on the other hand,” noted Rael. “My concern about that is that there may be a regulatory backlash because the interpretation has become so broad that there may be product safety issues with some of the chemically derived intoxicating cannabinoids, like delta-8 and other derivatives that are widely available in the market right now.
“There are no standards, and no safety protocols,” she added, “and I worry about teenagers in particular buying products that we don’t have any idea what’s in them or what was used to manufacture them. So, I’m very concerned about that segment of the market, while at the same time I’m very excited about the naturally derived delta-9 products, the low-dose products that are getting so much momentum, particularly in beverages in Minnesota. I think that’s a great model, but the industry is very complex right now.”
Which government agency is best equipped to address the nuances she is talking about? “At the moment, I think the best agencies are the state agencies that at least have some experience,” replied Rael. “I think what the FDA has done in not affirmatively regulating CBD is borderline criminal. It’s just ridiculous. This is a safe substance that has been widely used. I think there’s pressure from the pharmaceutical industry to keep it out of the mainstream, but that’s wrong. This is a naturally occurring substance that consumers should have access to, so I worry about the dynamics in all of the federal agencies, and I think that empowering the states to do what the states choose to do is the best thing for the industry for the time being.”
Is she at all concerned that some of that backlash could be written into the new Farm Bill, which is overdue. “100 percent,” replied Rael. “That’s why I’m concerned about the chaos of the hemp derivatives market and the complete lack of safety and efficacy regulations. Frankly, I do believe there are some players who are self-regulating, but many are not, and I have seen products that teenagers have access to that I just believe are unsafe products.”
What’s Ahead for Azuca?
I asked Rael if there is anything else in the Azuca pipeline that we can expect to see anytime soon. “We’re doubling down on beverages and the whole-plant solution,” she said. “A great innovation in an existing segment like beverages will really enable more manufacturers or brands to get into more markets and have a more consistent products, so we’re very excited about that in 2024. And then this whole plant innovation pushing into the market in 2024 creates a whole new category. I think of it as the closest the cannabis has come to experiencing fine wine varietals in an ingestible form. So, we are also very excited about that.”
Are there particular types of partnerships Azuca is especially interested in pursuing? “We are continuing to pursue single-state operators, single-state brands, multistate operators, multistate brands, and we’re expanding overseas,” replied Rael. “The beauty of our model is we work at any scale, so if you are a single brand in a single state, we can work with you in a cost-effective manner. If you’re The Cannabist in many states, or Wana Brands in many states, we can also work with you at your scale. So, we are expanding on all fronts.”
She added there is movement on the international front as well. “We are expanding in South America and in Australia as we speak. We are interested in Europe, but Europe is sort of tricky from a regulatory perspective. And we’re also looking at some countries in Africa.”
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