From Apple To Edibles: Défoncé CEO Says He Created Brand 'For People That Enjoy And Appreciate Chocolate'

Last year, Jeff Siegel wrote an article for Benzinga highlighting Défoncé, “an infused chocolate-maker that’s completely raised the bar in terms of high-end edibles,” as a prime acquisition target in the cannabis industry.

While the company still remains in the hands of its original owners, its value has continued to expand alongside its product line and name recognition. Benzinga had a chat with Eric Eslao, CEO and founder of the California-based cannabis company.

Before starting his own edibles company, Eslao worked at Apple Inc. AAPL’s iTunes.

“Working at Apple changed me: it made me a much more detail-oriented person and I took that same approach when starting Défoncé,” he said. “In 2014, I was looking at different investments opportunities and that led me to the cannabis industry, where I saw a clear market opportunity to target foodies — who want to consume cannabis discreetly and aren’t comfortable with smoking.”

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A Love For Chocolate

Eslao has always loved great chocolate. So, when he looked into the cannabis edibles space, he said he noticed there was a clear lack of good chocolate options in the market.

“Most chocolate edible companies don’t focus on taste. For our competitors, it’s just about potency and branding,” he told Benzinga.

Défoncé instead has made it a priority to recruit talented chocolatiers from well-known companies like Mars, Mondelez International MDLZ’s Cadbury and Godiva. The company sources materials from Belgium and France.

“We also developed a proprietary clean infusion process that does not leave a cannabis taste or smell. Défoncé is for people who enjoy and appreciate chocolate,” Eslao said.

All products are triple-tested, the CEO said: a full-spectrum test at the plant level to check for THC levels and substances such as pesticides; a second-full-spectrum test of the extract to ensure it's at desired THC levels and contamination-free; and a test of chocolate batches for THC.

Benzinga: Do you have plans to create CBD-infused products?

Eslao: We have a great pipeline of CBD-infused products but have been parking them until it is the right time. Consistently procuring high-quality cannabis CBD is still a struggle in California, and there is ambiguity with how hemp-derived CBD edibles will be regulated.

I’ve always been a firm believer that you don’t have to be first, you just have to be the best — so I’m content with focusing on THC until there is a clearer path to producing quality CBD edibles. Our THC products are keeping us busy, so there’s that factor too.

Benzinga: A few months ago, we published a story on Benzinga calling you a “prime acquisition target.” Do you see yourself as one?

Eslao: Absolutely. The average price of a chocolate bar is $2.26. Our chocolate retails for 10 times that! But the real opportunity is new customers.

Consumers aren’t replacing regular chocolate with our edibles — they’re replacing spirits, beer, wine and meds — so there is a lot of opportunity on multiple levels for someone like NESTLE A/S ADR NSRGY and/or Mars to acquire Défoncé.

Further, due to the newly adopted regulations, we are one of only a handful of large edible manufacturers that are still operating in California. I strongly believe the industry will eventually consolidate to two to three large manufacturers in our state.

Benzinga: How would federal legalization change your business?

Eslao: Currently, we can only manufacture and distribute our product in California. We’ve looked at out-of-state operators that will license our IP, but that’s extremely risky.

We may look at at opening bespoke manufacturing facilities in the future. But for now, I believe continuing to invest into the California market is the best allocation of capital. Federal legalization would allow us to scale intelligently, as it would make interstate commerce much easier.

Benzinga: What are the main challenges that your company and the industry in which it operates are facing?

Eslao: Staying ahead of the regulations. While we have a well-established brand, our focus has always been on compliance. Branding, marketing and even sales — none of those things matter if you can’t legally operate. As regulations naturally consolidate the edibles category, we’re positioning ourselves to be one of the market leaders.

Benzinga: What is your take on the cannabis industry consolidation? Do you have any M&A plans that you could elaborate on? Would you be interested in an opportunity to combine with another company or be absorbed by a larger business?

Eslao: While there has been quite a bit of M&A activity in recent months, I believe our company can generate higher returns on capital through internal reinvestment into our brand, product suite and manufacturing infrastructure.

Our company has built a lot of value: we've built the world’s largest edible factory, expanded into additional product categories and Défoncé has established itself as one of the most well-respected brands in the cannabis industry.

More recently, due to our focus on compliance and reputation for making high-quality products, we are increasingly seeing contract manufacturing opportunities to serve other cannabis brands, including other edible brands& and companies looking to enter into the cannabis industry.

The brand, coupled with our robust manufacturing infrastructure, should enable us drive more growth organically than through acquisitions of other companies.

Once there's a clear path to federal legalization — which may happen within the next three years — I think companies like Nestle or Mars may see substantial value in an edibles business that has built scale and gained substantial market share through profitable, compliant operations.

Benzinga: How do you fundraise? How much have you raised so far? Do you have any plans to go public? Would you conduct an IPO or RTO?

Eslao: To start the company, we raised over $3 million from friends and family and I invested $300,000. Last fall, we commenced an $8-million investment partnership with BR Brands, which is backed by Rose Capital.

Going public is definitely an option. For right now, our focus is building a company with solid fundamentals. Opportunities, like going public or being acquired, have a tendency to naturally occur once you have a good foundation.

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