By Eric Peterson | Feb 16, 2021
Costa Mesa, California
Contract cannabis extraction and manufacturing
Moussalli and co-founder Matteo Tabib saw an opportunity near the intersection of their respective backgrounds in sales for pharmaceuticals and alternative medical products and contract electronics manufacturing when California legalized recreational cannabis in 2016.
The dispensary space was getting crowded, and contract manufacturing emerged as a favored play. "We really have a good understanding of logistics and supply-chain management from our previous lives, so that is how we got into the manufacturing side of the business," says Moussalli.
It so happened Costa Mesa voters approved wholesale cannabis businesses in 2016, leading Moussalli and company to "quickly change gears," he says. "We were one of the first companies in Orange County to receive licensing as a manufacturer."
That also made the company one of the first licensed cannabis manufacturers statewide. "We were essentially the guinea pigs for the state of California and the guinea pigs for the city of Costa Mesa," says Moussalli.
Based in a pair of facilities that add up to 8,500 square feet, the bootstrapped startup took longer than expected to get up and running, he adds. "There were a lot of issues with the regulations, and a lot of ambiguity in certain things. The processes and the timetables to get open were incredibly challenging. It took us about a year and a half to get open with a simple co-packing/white-labeling facility, and it took us two years and six months to get open in our volatile extraction facility."
At first, brands and dispensaries didn't understand the business model. "They'd kind of laugh and say, 'Why would anyone need that? We're all
going to have our own licenses,'" says Moussalli, noting that an increasing need for compliance and specialization changed that dynamic. "Of course, that is absolutely not what happened, and now the shakeout is happening. A lot of people are unable to get licensed for various reasons, and so they have a brand or they want a brand and they come to somebody like us."
Se7enLeaf has focused on live and cured concentrates, vape cartridges, sprays, topicals, tinctures, and pre-rolls since its launch, but does not manufacture infused edibles or beverages due to high bars for compliance and low margins.
"We have a narrow focus -- we know what we're good at, and we don't try to mingle with things we aren't comfortable with," says Moussalli. "Our passion and our real niche is hydrocarbon extraction. . . . That's extracting with butane and propane, and making live concentrates -- concentrates that are extracted from a freshly frozen cannabis plant."
Consistently higher yields and an emphasis on quality are prime differentiators, he adds. The extraction system is not proprietary -- Moussalli keeps the manufacturer unnamed -- but there are a wide range of factors that contribute to a better end product.
"You have to have the right team, you have to understand yields, you have to understand margins, you have to understand plant material in order to get the perfect output," he says. "There are things we do differently with the pre-process, the post-process, and the extraction process itself."
"We're not interested in making B-grade products -- that's not who we are, that's not what we do," says Moussalli, recalling a thawed delivery of cannabis feedstock leading to a cancelled production run. "I told the customer, 'This is not going to extract well. Your yield is going to be affected by at least a couple of percent and the product isn't going to be that great. If I were you, I'd reject that shipment.' That put me out of that revenue for at least three or four weeks now, but these are things our customers appreciate."
Moussalli keeps the names of Se7enLeaf's more than 20 customers under wraps, but notes, "We co-pack for one of the biggest concentrate brands in the state, we co-pack for one of the biggest pet tincture brands in the state, and we co-pack for one of the biggest vape brands in the state. We have some big clients, and it's taken time to build those clients and build the trust and have the reputation we do in the market."
"We are a boutique contract manufacturer with high-volume capabilities and concierge service for our customers," says Moussalli. "We do not just take orders and make products. We take orders, we understand the customers, we help the customers with their supply chain, managing their supply chain. I'm talking about raw materials, I'm talking about packaging, I'm talking about compliance."
He continues, "We are a premium manufacturer. We are not the cheapest out there by any means. I don't think we're the most expensive, but we're definitely not the cheapest."
Moussalli says the facilities were built to cGMP standards, but Se7enLeaf is holding off on certification until the law requires it due to the cost and uncertainty. "We're waiting, because if federal legalization happens, you may need to go for ISO 9000," he explains.
White labeling accounts for 40 to 50 percent of sales, and contract manufacturing represents 50 to 60 percent. Growth has come in fits and starts. "It's an upward curve, but it's not a steady curve," says Moussalli of Se7enLeaf's trajectory.
Challenges: A "perfect whirlwind of problems," for legal cannabis in California, says Moussalli. "You've got 700 legal retail outlets for the whole state of California. You've probably got 3,000 to 4,000 illegal retail outlets for the state of California, with a lack of enforcement and pricing that's 40 percent less than what we're selling at in the legal shops. On top of that, you have 68 percent of the cities in the state still banning retail cannabis."
He adds, "It's causing much slower growth and it's putting people out of business. It really is."
Opportunities: Moussalli forecasts live extracts will drive growth for Se7enLeaf. "We banked on live products being the future, and we're seeing that trend now," he says. "More users are starting to understand they don't want just a basic distillate. They want a full-spectrum concentrate, 100 percent derived from the plant with no other additives."
The company currently produces about 300,000 pre-rolled joints monthly, and that number is forecast to continue to rise. "We're very good at it, and we're very quality oriented," says Moussalli. "Pre-rolls and flower make up about 60 percent of the market in California. Those are not going anywhere anytime soon."
Cannabis consulting is another opportunity, and Moussalli and Tabib launched M Consulting Experts to capitalize on it. "That's something we do on the side because of the knowledge that we have," explains Moussalli.
Needs: A big market correction for legal cannabis in California (see "Challenges" above). "What we need is the market to fix itself," says Moussalli. "Economics are going to slowly force these black market guys out, because right now it's like Whac-A-Mole. You shut one down, it takes three months to shut them down, and then they open down the street again."
"Everybody always needs more capital," he adds. "Every month there's a bill for at least $10,000 of stuff you don't anticipate."
Moussalli notes that Se7enLeaf was able to get a revolving line of credit from an unnamed bank in late 2020 after a six-month wait. "It's changed the way we do business dramatically," he says. "Banking is a competitive advantage in this industry. If you have a bank, you have a competitive advantage."