A Nevada Cultivator Learns Hard Lessons from the Pandemic
Free Book Preview Cannabis Capital
With New York's recent legalization of adult-use of cannabis and New Mexico and Virginia legalization around the corner, the U.S. is well on its way to having 18 states with legal adult-use cannabis by the end of the year. On top of that, Senate Majority Leader Chuck Schumer is gearing up to introduce some significant federal cannabis reform measures to speed up legalization on the national level. Together, with vaccine rollouts and the promise of reopening, these tailwinds create a situation where tourism and cannabis may have a solid second half of the year.
There is perhaps nowhere else in the world where that impact will be as significant as in Las Vegas. The city was one of the hardest hit by the pandemic in terms of economic losses and unemployment. Devastated by the lack of tourism, Las Vegas and the state of Nevada are desperate for visitors and revenue. Perhaps the light at the end of the tunnel is coming into sight, with large conferences like MJBizCon returning to Las Vegas this fall.
For Nevada-based cannabis business Flower One, the struggles began before the pandemic. Flower One Holdings (CSE: FONE) (OTCQX: FLOOF) is one of the largest cultivators and manufacturers of Cannabis in Nevada. The company white-labels Cannabis products in multiple categories. Earlier this year, Kellen O'Keefe, Flower One's President and Interim CEO, took on the improbable challenge of turning the company around, viewing the pandemic as an opportunity to retool, restructure, and reinvent the company [editor's note: the author owns shares of Flower One].
According to O'Keefe, Flower One made many mistakes typical of early cannabis businesses, including improper expectations, not underestimating how expensive and competitive the industry was, and having overly estimated revenue projections. The management team ended up trying to get too big too fast without achieving operational excellence. In the process, they took on expensive capital with complex terms. "To be honest, the product that Flower One launched with just wasn't good enough to support premium brands and left a lot of room for improvement," says O'Keefe.
Lessons from MedMen
O'Keefe, who previously served as SVP of Business Development at controversial corporate Cannabis giant, MedMen, knows all about the many pitfalls of early Cannabis companies. MedMen and its Apple-inspired ritzy retail model enjoyed a meteoric rise before crashing and burning in a particularly heinous fashion. MedMen's founders were sued, accused of unprofessional behavior, and ousted. The company effectively went bankrupt after being unable to pay its debts. They had to lay off hundreds of employees, and many investors got burned.
"It's tragic to see the current status of MedMen. I would never have envisioned that MedMen would become what it did. That being said, my time there was one of the greatest learning experiences of my life," explained O'Keefe, who helped raise private capital and source deals for MedMen. "It's clear to me that as the Cannabis industry evolves, it's becoming even more important to choose good partners and prioritize best-in-class corporate governance," O'Keefe added.
He says he has assembled his "dream team, recruiting two new board members: Mitchell Kahn, who co-founded and sold Grassroots Cannabis to Curaleaf for over $800 million, and Eliza Gairard, a partner at NYC-based Richmond Hill Investments, the capital partner to one of California's largest Cannabis distributors. These additions came only a few weeks after Nitin Kaushal, former Managing Director for PwC's Corporate Finance practice in Toronto, was appointed to Flower One's board of directors.
Making good out of bad
Beyond beefing up the board, O'Keefe has been working hard to restructure debt and implement product quality and operational efficiencies. He's been the architect behind Flower One's brand partnership efforts, adding relationships with popular Cannabis brands, such as Cookies, Old Pal, Lift Tickets, and Nature's Lab into the company's portfolio of brands. Some of these brands converted the debt owed to being compensated with equity in Flower One, something O'Keefe sees as a vote of confidence and sign of commitment. He wants to make sure that its flagship facility, a 400,000 square-foot high-tech greenhouse, is pumping out high-quality products that will demand a wholesale and retail premium. This has included bringing in new standard operating procedures, new genetics, new technologies, and new drying and curing methods. "Our product has come a long way from what Flower One launched with, and the market recognizes that, as we've more than doubled our average wholesale price per pound of flower."
While Flower One is still restructuring, it remains to be seen if O'Keefe can deliver value to shareholders. The measures he's taken to fortify the company's balance sheet, board of directors, and product quality are substantial. I asked O'Keefe what his dream ending to the Flower One turnaround story would be. He told me that a few years from now, he wants Flower One to be the most valuable cultivation and manufacturing MSO in the country, with a market cap several multiples higher than today.