Kosmik Brands is one of the fastest growing cannabis companies in the country, building a loyal following in its home state of Oklahoma before branching out into other states through a successful licensing model.
The company’s chef-inspired edibles have propelled Kosmik’s expansion into seven other states, with plans on the horizon to move into nine additional states soon.
Marijuana Venture sat down with Kosmik chief financial officer Paul Vancea to discuss the origins of the company, its incredible growth, the challenges of operating in multiple markets and what the future holds for the Oklahoma-based brand.
Marijuana Venture: How did Kosmik get started?
Kosmik chief financial officer Paul Vancea.
Paul Vancea: Kosmik Brands was started in 2019 in Edmond, Oklahoma, by a group of entrepreneurs who wanted to offer innovative, high-quality cannabis wellness products, that are unique and taste good.
Kosmik is credited with being the creator of a high-quality high-dosage gummy. Kosmik’s first claim to fame was The Black Hole with 1,000 milligrams of THC per package (100 milligrams per gummy), which was first conceived by our chief operating officer, Cameron Saner. Back then, most gummies had only 10 milligrams of THC. At a cannabis event, Cameron met a U.S. military veteran who said he needs THC to manage his pain but was frustrated with the amount of gummies and sugar he had to eat to ingest enough THC needed to provide relief. That day, Cameron had an epiphany to put 100 milligrams of THC in a single gummy specifically to help such patients, and The Black Hole, our best-selling product by far, was born.
Since then, we went even higher, with 200 milligrams of THC per gummy (2,000 milligrams per bag) with our new best-selling product called The Abyss, and we are currently launching a 300-milligram gummy called The Void (3,000 milligrams per bag).
We’ve also launched a 2-milligram Live Resin Black Hole Vape (12 different flavors/SKUs) in Oklahoma, which won Best Vape Awards in Oklahoma City; we’re currently working on launching these vapes in other states as well.
Our gummies and vape products have consistently won awards in Oklahoma and other states. The most recent award was first place for “Best Edible in Massachusetts” for the Kosmik Peanut Butter & Jelly gummy at Croptober Festival in Massachusetts.
MV: The franchising model works well in many industries in the United States. What got Kosmik interested in that model for cannabis edibles?
Vancea: Unlike every other industry in the United States, the cannabis industry poses unique obstacles to expansion. Because every state has its own regulations, and interstate commerce is prohibited, the licensing model is one of the least expensive, most profitable and fastest ways to expand our business and products to other states. In essence, we have to recreate our business in each state we go to, which can be very costly, cap-ex intensive and a logistical nightmare.
The franchising model allows us to leverage other operators in each state and use their already set-up manufacturing facility and compliance team, as well as sales and distribution channels. In exchange, we offer a product and brand that has been proven successful and popular in other states, together with the brand support, marketing, advertising and sales.
It’s an asset-light model, where we leverage our brand, intellectual property and recipes, without having to buy licenses, build a production facility, hire manufacturing staff, hire lawyers, etc. for each single state.
We believe brands are the future of the cannabis industry, and Kosmik Brands is one of the most well-positioned brands to dominate in the cannabis edible and vape categories.
MV: How much support does Kosmik Brands provide its licensees? Is there national marketing to support the licensees? Are they required to kick in a set amount for marketing?
Vancea: Kosmik provides the licensees with production kits and packaging (the joke is that we provide them with sugar and plastic).
We provide them with all the necessary training and support to ensure they have the tools necessary to manufacture high-quality products. We provide them with SOPs both for manufacturing and sales.
We provide them brand support, such as swag for dispensaries, uninfused samples, etc., as well as digital marketing support on Instagram, LeafLink and Weedmaps.
We provide them with sales support, as our sales team goes to each state for the initial launch, key events and conferences, etc.
Usually we aim to split the cost of marketing 50-50. For example, if there is a cannabis event that requires a participation/sponsorship fee, marketing materials, etc., we will split those costs with the licensee.
MV: What challenges are posed by the myriad rules and regulations that differ from state to state?
Vancea: The ever-changing rules and regulations in other states pose the following challenges. This isn’t an exhaustive list, but they’re the main ones:
– SKU creation: Our gummies go from 100 milligrams of THC to 2,000 milligrams per bag. Of course, most states do not allow 1,000 or 2,000 milligrams of THC per bag, so we have to create new SKUs that fall in line with each state’s limits. For example, Montana doesn’t allow 1,000 milligrams per bag, but it does allow 800 milligrams per bag. So we created a new “Black Hole 1,000 milligram” SKU, to have only eight gummies with 100 milligrams of THC, instead of 10.
In Massachusetts, the limits are 100 milligrams of THC per bag, but only 5 milligrams of THC per piece, instead of the regular 10 milligrams. So we needed to create new SKUs: we created a 10-milligram gummy, with a 3-millimeter striation on it, which basically makes it two pieces of 5 milligrams apiece. This was allowed by the state, so our 100-milligram bags still contain only 10 gummies instead of 20, but each piece is considered two gummies.
– Compliance changes for packaging: When we launched in Michigan (we have since stopped operating there), we created our packaging design according to their regulations and ordered our packaging by the thousands. Within a few months, Michigan changed their design compliance (they no longer allowed fruits, so an orange fruit had to become an orange circle on the package). This rendered our existing packaging inventory useless, and we had to spend more money for new designs and order new packaging.
Something similar happened in Missouri, where they too changed their packaging regulations to limit colors, etc. So, again, we spent more resources to create a new design and purchase new packaging.
– Licensing fee structure: Some states allow a revenue share model as a percentage of top-line revenue; others insist on setting a fixed fee for licensing revenue. So, we’ve needed to adjust the way our deals are structured, as well as the language in our contracts.
MV: Quality control has always been a huge part of the success of franchising. Without it, you’re dead. How does Kosmik stay on top of quality control?
Vancea: Quality control is part of our mission statement and something we take very seriously at Kosmik. Our QC efforts are multi-pronged:
– Initial and ongoing education: We provide our licensees with tutorials and training platforms that provide very specific information and instructions on how to manufacture our product, deal with challenges and keep a clean facility, as well as sales and marketing training for their staff.
– In-person training: Usually when we launch a new state, we invite their team to come to our Kosmik headquarters in Edmond for a few days to get hands-on training. Their cooks spend time with our chef and kitchen staff and learn how to make our products. Their sales staff spends time with our sales leaders and learn how to pitch the products, etc.
– Licensee visits: Our staff also goes to our licensees’ headquarters. Our chef cooks the first few batches with them, shares our SOPs and expectations. Our sales team helps launch the products, goes to dispensaries, meets important buyers and creates a long-term brand support strategy for each state.
– Recurring check-in calls: We have scheduled weekly/biweekly calls with each of our licensees to go over performance, goals and successes and solve any issues arising. This is also when we discuss pricing, sales strategies, new products, feedback, etc.
MV: How do you ensure your licensees perform to your requirements? Are they required to meet certain performance goals? And how do you set those goals?
Vancea: Yes, our licensees definitely have requirements.
The most important requirements are manufacturing high-quality products in a compliant way and following our SOPs and recipes to a T.
We try to impose sales and revenue goals and provide as much support as needed to accomplish those goals, but in the cannabis industry, performance rarely matches projections. Sometimes our licensees are in a state that just passed legalization, so by definition, everyone in the industry is a startup, which means there will be countless challenges, delays and failures in the beginning. Also, the ever-changing regulations in each state sometimes put a hamper on our sales goals. As long as we believe our partners have portrayed their resources accurately, communicate honestly and act to the best of their ability, we are willing to work together and build the business in that state.
We set goals together with the licensee, based on their manufacturing, sales and distribution capabilities, as well as the market outlook. Obviously, we prefer to work with operators that have successfully done this before.
MV: Are the price points similar in each territory or are the licensees free to set their own prices?
Vancea: No, the price points vary drastically in each state.
States with a higher number of licenses and/or a thriving black market usually have cheaper prices (for example, California and Michigan). States with a limited number of licenses, with limited canopy space and/or a limited number of dispensaries tend to have significantly higher prices (Missouri, Illinois).
We collaborate with each licensee to set prices that are competitive and accurately reflect our product quality. Licensees usually have their hand on the pulse in their own markets, and together we determine what SKUs, prices and promotions to run in each state. We do put minimum pricing in contracts, but have the ability to lower them if our licensees tell us they need some price flexibility to move product, get rid of expiring product, get rid of product with packaging that no longer meets new state compliance, etc.
MV: Are there any legal issues that you, as the licensor, might face in the case of bad or defective product?
Vancea: The short answer is that the licensee is legally liable for bad product, due to the fact that they own the manufacturing license in that state, they manufacture the products, assure its compliance and sell it. But it depends whose fault it is. Ultimately, the responsibility of selling great products falls on the licensees. If they messed up production and have a bad batch of products that don’t meet our requirements, or did something non-compliant, or bought illegal distillate (usually unbeknownst to them), etc., the legal burden falls on them. They are the licensed facility, they’re the ones manufacturing the final products, they’re the ones that must verify and assure compliance.
If the defective product is Kosmik’s fault (such as us providing them with faulty vape devices), then we will, of course, work with the licensees to replace them at our cost.
Regardless, when we sign up with a licensee, we do so as a partnership, and our goal is to work together to solve the issues as true partners. If they sell defective/non-compliant/bad products to dispensaries, we will work together and offer as much support as needed to make sure the dispensaries are provided with credits or new product, and they don’t suffer because of us or our licensee partner in that state.
MV: Which states are on your horizon and set for expansion?
Vancea: We’ve currently expanded into Arizona, Illinois, Nevada, Massachusetts, Mississippi, Missouri and Montana. We currently have the following states on our horizon: Colorado, Florida, Maine, Maryland, New Jersey, New Mexico, New York, Vermont and Washington. These are states we are actively working on to establish partners in. We are also pursuing opportunities in Canada, Thailand, Uruguay and a few other countries.
This interview has been edited for length and clarity.