Find more at @David_Kretzmann.
Run time – 21:57 (Transcript below)
David Kretzmann: David Kretzmann here at MJBizCon, and I’m joined by Vinay Tolia and Steve Klein, who are both with Flowr. I’m kind of going in blind here, as Jim Walsh was kind enough to reach out and set this up, but I understand you’re an emerging company in the cannabis space. You might have a relationship with Scotts Miracle-Gro. So, I want to learn, I want our members to learn. So maybe one of you can just jump in to explain what Flowr is, and how you both came together to be involved in the cannabis industry.
Vinay Tolia: I’ll give a little background on myself. So, I founded a hedge fund in 2006 with my twin brother Steve, and his group were the seed investors of the hedge fund. Hence, I was telling you why I’ve been reading Motley Fool for a long time. In about 2014, we started doing a lot more private deals in the cannibis space in the U.S., and through Steve and their network, we met Tom Flow, the co-founder of MedReleaf, and we all founded Flowr together in 2016.
David Kretzmann: And what is Flowr? Are you a cultivator? Where do you fit in within the cannibis landscape? Steve, you want to take that?
Steve Klein: Sure, sure. So, yeah. We bought a late-stage applicant about a year and a half ago, I think it was, and turned that into a license to build, and then a license to cultivate, and just got our license to sell on Friday. As Vinay said, Tom Flow, who founded MedReleaf, built the facility in [Markham 00:01:34] there, and put in all the SOPs and protocols for cultivation there. Has that same position with us, and have a lot of confidence and excitement about what we’re doing out in Kelowna, which is where the production is.
We’re building an 84,000 square feet cultivation facility, of which 40,000 square feet will be actual flower room. Should get about 14,000 kilos out of it next year. Very high density of plants, a very high yield per foot. That’s one of the things we’re very focused on. It’s one of the things we think is the critical factor to putting money on the bottom line, to getting high top line and high bottom line, is how many grams per foot you grow.
The other sort of critical advantage I think we have over a lot of other folks is that Tom is able to set up these facilities in a way where he can grow clean product, and pass Health Canada inspection without having to irradiate the product, which is a pretty unique thing. You mentioned Scott Miracle-Gro. They’re a subsidiary of Hawthorne Gardening. Has done a big roll-up in the industry, and owns a lot of the top companies, and a lot of different picks and shovels, kind of parts of the business. We’re they’re exclusive R&D alliance, so we’re building a R&D facility together on our campus. 50,000 square feet, right next to our flagship cultivation center, and we’ll be doing all sorts of R&D out of that with the Hawthorne folks and our scientists and their scientists.
But yeah, we’re an LP, we’re a cultivator. We aim to deliver the highest quality product without irradiation, and deliver product at scale with very high yields, and really look at both the quality of the consumer experience for the good flower, as well as the quality of the P&L for top and bottom line. And profitability, quite frankly, because I don’t think people have mastered the notion of growing profitably yet at scale, and that’s something that we’re focused on, and think we’re going to do.
Vinay Tolia: If I can add, quickly, just because you asked about Scotts … People say, “Why Scotts? Why did Scotts pick Flowr?” It’s because, Steve mentioned, that they rolled up all these ancillary companies around the cannibis space. They need a partner that can grow consistently, because they’re gonna be testing their technologies. And so they need to make sure, if they’re testing a new light or a new nutrient, that whatever the change is to the plant, it’s because of their light or nutrient, and not some inconsistency in the grow. They have the utmost faith in Tom and the team, to be able to grow consistent product time and time again, and that’s why they chose us.
David Kretzmann: Got it. Now, from an outsider’s perspective, like as someone who’s relatively new to analyzing and evaluating the cannibis space, someone might say that it already seems pretty crowded. So, as a relatively new entrant into the cultivation space, just what does that process look like? I mean, you need to assemble a team. Put together some semblance of a vision that’s differentiated, and ideally, sustainable over the long term. What does that process look like, from having the idea, getting the team, getting the funding, and then just kind of rolling out the strategy?
Steve Klein: Yeah, I really do think it does start with that core thing we were talking about, which is being able to grow profitably at scale, and being able to grow high quality product. Because there’s a lot of companies, a lot of LPs, but when you actually look at the numbers, not a lot of sales. Not a lot of product being grown. I think the runway for the industry right now in Canada is something like 80,000 kilos for the entire industry? Something like that? So it seems like it’s a mature market, and there are obviously some very big market cap players in the space, but when we look at the numbers, it doesn’t look like anyone’s mastered the ability to grow at scale at a profit. And ultimately, that’s what you’ll have to do to be a viable company, in our opinion.
It’s what we’re focused on as the thing we get to leverage, as what we think is gonna be our sort of core and critical edge. Once we have that … Obviously marketing, and sales, and company building, and distribution, and foreign deals, and all of that comes into play … We have made some very cool inroads to deals. We talked about Scotts Hawthorne. There’s a couple other companies that we haven’t quite finished penning deals, that we’ll be announcing. But, working on some critical marketing joint ventures, as well as a couple other really interesting things, as well as a couple of foreign things. But as we get our core business up and running, and where we’ve got 25% of our facility up … We’re about six months away from finishing the full facility. There will obviously be growth in space, but we’ll also be growing out the team as we have more resources to do all the things you’re talking about.
But we really do feel kind lucky to have a critical differentiator, walking in the door. We don’t think there’s gonna be much non-irradiated product for sale in the legal markets, and we think we’re gonna be forming a big portion of that market … And that’s a differentiated market. High quality flower that’s not irradiated. And again, I think we’re not gonna have to tap our balance sheet to carry losses. Once we have a facility up and running, I think we’re gonna be generating profit. So, having those two critical advantages, and then building the market and branding sales, all the biz dev that goes with it is a tremendous advantage to start with, we think. And looking forward to all those other pieces of the business as well, but the vision starts with those core competencies, that we think we have an edge on.
David Kretzmann: And for someone who’s not familiar, like me, can you just explain what is the irradiation process? Is it by having an alternative to that that you’re able to grow at scale, and presumably profitably? Can you just explain what Flowr is doing differently, whether it’s with irradiation or anything else, that enables you to grow this quality product at scale?
Vinay Tolia: I’ll touch on the last thing you said, which is grow profitably. And really what that means is, to Steve’s earlier point, growing as much product on the footprint as possible. That’s yield. And also, high quality product. Quality is more than just irradiation or not irradiation. It’s desirable strains. It’s consistency. This is a medicinal market. People want consistent medicine every time. You wouldn’t take Advil if you didn’t know if you were taking Advil PM, Advil Extra Strength, or regular Advil. Right? So, those are all the things that go into quality.
Now, as far as irradiation, it’s from the design of the facility, the construction of the facility, and it’s from the grow, and the processes involved in managing the harvest. There are so many things that can go wrong in a grow. Even if you can control all the environmental variables, there’s still so many things that can go wrong in the grow, and you need that expertise to be able to go from seed to harvest in a very measured way. That’s our edge in growing non-irradiated product, is it’s all of it. There’s no one secret. It starts from the design, it starts from the construction, and then it goes through the processes. That’s why it’s so hard to grow non-irradiated product. I mean, there’s so many points of failure in these facilities. One little outbreak here, or one little irrigation line that’s contaminated, and you lose your whole crop. So it’s this, building the system that’s designed for this, and factoring in redundancies, and the expertise that’s really only gained after decades of experience, and that’s what our team has.
Steve Klein: Yeah. It’s also the rare person like Tom that has both the 10,000 hours of and skill of an expert on the cultivation side, as well as 10,000 hours and talent of an expert on the design and engineering and build side. He really does have both, so every time he builds a facility, it’s with an eye towards controlling every part of the environment he possibly can, to nurture the flower in a way … On top of all the other factors that I mentioned … To grow it at the best yields, and the most consistent quality.
And with each design … And he, Tom, designed a whole bunch of facilities under the old program, when they had aggregated growers for individual users before they made it the commercial program. I think he designed something like 17 facilities, around?
Vinay Tolia: Him and the team, [crosstalk 00:10:26].
Steve Klein: And the team. Right, and the team that’s with us as well … And it’s from 3,000 square feet to 30,000 square feet, I think he had built, and then the Markham facility of MedReleaf’s 55,000. And now this one’s 84,000, and it really looks nothing like the Markham facility. He just iterates every time. And as great as the facility is at Markham, what controls he didn’t have there across the environment, he iterated the design and the build to gain more control. So, this new facility that we’re building in British Columbia, Flowr’s building in British Columbia, is this incredible, state-of-the-art facility, with amazing levels of control of all the different variables, that Tom and the cultivation team can manipulate to get that very high quality, clean flower.
But as Vinay says, it comes down to just work flow, design, redundancies. There’s a million ways you can fail. It’s a tremendous effort. It’s both skill and work ethic, honestly, because there’s no [inaudible 00:11:27]. It’s not easy, even for Tom and the team. But yeah, it’s a rare skill. We don’t know of a lot of people that are able to do that at scale, grow high end flower that doesn’t need to be irradiated.
David Kretzmann: Mm-hmm (affirmative). So, construction on the facility is underway. It’s a work in progress. Flowr is still a private company. What should we be looking for over the next 12 to 18 months, when it comes to Flowr?
Vinay Tolia: We can’t get into too much of the details, but we have announced that we’ll be going public on the [inaudible 00:11:59] shortly, so we won’t be private for long. And as Steve said, we have a lot of exciting announcements and relationships on the marketing side, on the international side, and even with some … You know, kind of household name companies, that you’ll definitely be hearing about in the next 12 months.
David Kretzmann: Awesome. From a retail investor’s perspective, and I’m sure you all are familiar with this, pretty much every cannibis company right now doesn’t have much in a way of a track record. Pretty much any company you’ll talk to will say, “We’ll have the highest quality product, the lowest cost of production. We’ll have the best distribution, the best brands.” So, for investors … And at the Motley Fool, we’re investors helping fellow investors … how can we discern the fluff from the companies that are building something legitimate, when so many companies right now are talking about where they’ll be in the future, whereas today, there might not be a whole lot to go off of?
Steve Klein: It’s a great question. There’s two sort of easy answers, I think from our point of view. One is, Tom and the team’s track record at MedReleaf is one gigantic data point to look at. So is Tom and the team’s track record before that, in the old program. But when you look at MedReleaf, and that Markham facility that they built, designed, and started the cultivation at, it’s the most productive facility in the country, I believe to this day. You know, even though it was built five years ago, at this point. So, you look at people. I think you need to look at who’s behind them, and what credibility they have when they make the statement, “We’re gonna grow the best … ” I don’t hear a lot of people talking about yield, honestly. So even if you grow the best … You know, are you making money doing it? Are you growing enough of it on a footprint to make money?
But the other big one now is, anybody who comes to our facility can see the difference between what we’ve built, what we’re growing, where we’ve built it. It’s a pretty tantalizing visual when you come to the facility and check it out. But the third thing, I think, is what Vinay said before, which is the Scotts Hawthorne imprimatur, in a sense. Right? If they needed to pick one company to give them consistency in testing and iterating inventions, then the fact that they chose us before we’re public, and before we’re sort of anybody, I think says a lot about them doing the due diligence on Tom and the team, and having that comfort, and not needing to go with the biggest name and the biggest market caps. Another very strong data point to look at.
So, I’d say those things. But it comes down to A, track record, and B, what are you doing now if you’re doing something? And on both counts, I think we sort of have the best story out there, honestly.
David Kretzmann: Once the facility is up and running, what’s the plan to sell it? Will it be medicinal cannibis? Will it be recreational, Canada, international? What does that look like?
Vinay Tolia: So, we’ll be in the medicinal. We just got our license last Friday. We’ll be selling to patients next week. We fully intend on sticking within the medicinal market. We also have a supply agreement signed with British Columbia, and we’re talking with a handful of other provinces. So, we’ll be in the rec market as well. We have a negotiated term sheet to sell to a German distributor. And then, we’re also looking to expand our reach into Latin America, and some place in the Caribbean as well. So, we’ll be all over.
David Kretzmann: And today is obviously a huge day for the industry, with Constellation Brands announcing an additional $5 billion investment into Canopy Growth. Well, $4 billion U.S., $5 billion Canadian. Either way, a huge chunk of change. Canopy is now swimming in cash. They weren’t exactly lacking for cash beforehand. So, as folks who are working with a smaller, an emerging cannibis company, when you see an announcement like that, is that encouraging? Is it discouraging? Just how do you think about it?
Vinay Tolia: It’s very encouraging. I think this is positive for the overall space. It gives validation to the entire space. And on that note, as a writer for Motley Fool, if you look at New York listed companies that have done deals with Canadian LPs, it’s been Constellation and Canopy, and Scotts and us. Those are the only two.
David Kretzmann: Mm-hmm (affirmative). Yeah. That’s awesome. Going forward, say the next three to five years … And at the Motley Fool, we’re business folks investors. We don’t even have the ability yet to invest in Flowr if we wanted to. But for business folks investors with a long-term time horizon, like us at the Motley Fool, what should investors in the cannibis space be watching? What metrics, what trends should we be watching? Because obviously at this point, the industry has been so dominated by shorter-term speculation and day trading. For us business folks investors, what should we be watching over the next few years?
Vinay Tolia: I think you have to look at profitability and cash flow. If you’ve been looking at that, and you’ve been seeing the Canadian companies, there’s not a lot of focus and emphasis on that. That’s where one of the reasons we think we’re different. We intend to be cash flow positive next year. To answer your question, I don’t think this is any different than any other business. At the end of the day, if you’re looking long-term, cash flow and profitability are what matter, and I don’t think this will be any different, if you’re looking at five, 10 years in the future.
Steve Klein: I would just agree with that. Add to it, and maybe beat a dead horse further … But, yeah. I mean, if you look at the larger company models, they’re acquiring more and more funded capacity. You know, land that you can build on, and money you have to build it. But if you look at current operations, if you’re losing money in your current grow operations … And I mean losing money. I mean, discreetly you’re making less than you’re growing it for … Adding square footage, it doesn’t get easier to grow efficiently as you have to manage more square footage. It gets harder. So presumably, until people figure out how to do that profitably, the more capacity you generate, the more losses you’re presumably gonna generate. Doesn’t mean you’re not gonna have a huge footprint in the market, doesn’t mean that scale doesn’t matter, and doesn’t mean that we don’t highly respect the companies that have grown like this.
But we do think that that … You know, on the investor side … We came at this as investors, as we told you. We started our involvement here as passive check writers. We ended up becoming part of active board members and management because of the opportunity, and because we see an edge that we have in our production team, our design team, as the core to build everything else around. People, obviously with scale and tremendous bank, are gonna be around for a long time, but we do think that … Like any emerging industry, and I always like to use the Internet as one, because I was a younger investor then that had to try to figure out where the value lies in all these plays. And a lot of the plays that were sky high obviously went down tremendously.
This is an asset-based business, so I don’t think people are going to zero unless they take on lots of leverage, and you haven’t been able to do that yet, so that’s probably not a risk. But I do think that once people figure out where the motes of value … And I think everybody’s trying to figure out where the motes of value are … That’s what’ll get sort of shaken out over the next couple of years, and it’ll be based on what Vinay said, profitability. And again, that core edge going back to it that we have with Tom and the team, we think that’s the metric people will start following, and … Yeah.
Again, it always surprises me that it’s not a requirement to report your yield per square foot of cultivation. Because you know how much cultivation space you have, and you know how many grams you grew. It’s simple algebra, if you want to disclose that. But there hasn’t been much of a push to have people disclose that. A critical KPI. I mean, every retail, every real estate business I know of gets measured on productivity per square foot. Because it’s expensive to build those things, and then you have to operate them, and that’s the KPI that should get the most focus, on top of the quality you’re growing. And again, we’ve mentioned that as well.
But yeah. In the end, those two things. The quality will get you higher margins, and the yield will get you a lot more product to sell at a smaller cost of goods sold, because of the efficiencies. We think that that ultimately will become what people get better at that are bigger and win, or what small guys like us are very good at, and grow with that skill set, and be one of the winners.
David Kretzmann: Awesome. Well, I think we can wrap up in a bit. I want to give you the floor, if you have any other final thoughts you want to say before we part ways. Just for what people should be watching, where people can learn more about Flowr, or anything you want to share with our members.
Vinay Tolia: You can visit the website, Flowr, F-L-O-W-R.ca, for any info on the company. I would just … I know we’ve said this a bunch of times, and I will just echo Steve’s sentiments, that from an investing point of view, this industry is no different than others. Profitability will matter eventually. And so, I would … If I had my investing hat on, I would still look for companies that can be profitable, and will be profitable for the next five to 10 years.
David Kretzmann: We’ll leave it there. Steve Klein and Vinay Tolia of Flowr. We certainly look forward to following the company’s progress in the quarters and years ahead, and hopefully we can keep the conversation going down the road. So, thanks for taking some time to talk to the Motley Fool.
Vinay Tolia: Thank you so much.