The Cannabis Industry Continues to Amaze: 2021 Lessons Learned and 2022 Trends to Watch

When Flora Growth debuted on the Nasdaq in May 2021, the company publicized the U.S.-based initial public offering (IPO) as the first known cannabis cultivator to list without using a special purpose acquisition company (SPAC), reverse merger or dual listing. The move included a $30 million pre-IPO equity raise in 2020, and then another $16.6 million once it completed the IPO.

Since then, the globally motivated company, which leverages natural, low-cost cultivation practices on a roughly 250-acre, all-outdoor operation in Bucaramanga, Colombia, has been full steam ahead on executing its strategic plans, including a headquarters relocation from Toronto to Miami.

During the past six months, Flora Growth has acquired California-based Vessel Brand Inc., a vaporization brand, for $30 million, and entered into various partnerships and distribution agreements.

Specifically, Flora Growth also made a $2.4-million preferred supplier investment to a Hoshi International subsidiary in Portugal, and the company also secured a licensing agreement to enter the cannabis beverage market under the Tonino Lamborghini luxury lifestyle brand, with a CBD product line that aims launch in the first quarter of 2022.

RELATED: Cannabis Pipeline to Europe is Open; Flora Growth is Investing

These moves are the first of many synergistic steps intended by Flora Growth to launch its 300-plus products across the world, president and CEO Luis Merchan told Cannabis Business Times.

Editor’s Note: This interview has been edited for style, length and clarity.

Tony Lange: How’s your headquarters transition from Toronto to Miami going so far?

Courtesy of Flora Growth | floragrowth.ca

Luis Merchan: It’s going great. I went ahead of the team on June 24 and moved permanently to Miami. We have been working to bring the balance of the North America team here, but we certainly believe that Miami is the right place to be. It’s a massive business hub. Tons of companies are coming from many industries, including cannabis. The port is having a tremendous amount of activity we feel is the perfect bridge between our South American operations, North America and Europe.

TL: Did the possibility of future M&A activity play a factor in Flora Growth’s consideration for its headquarters?

LM: Yeah, M&A was a consideration. There were a number of factors and variables that we included in our evaluation matrix. And there were five cities that were in the competition to become our headquarters. But certainly M&A was one of those, as well as human capital, the tax system for the state and the county in which we’re going to be operating, and then of course our ability to secure air transportation and our ability to attract the talent pool from all over. And obviously there are a lot of great companies that are based out of the south Florida area. From a logistics standpoint, when you work close by, it’s more likely that we can make a transaction happen.

TL: What are some of the main principles of Flora Growth’s M&A strategies?

LM: We have three fundamental strategic priorities when we are considering an M&A target. The first one is human capital. We wanted to make sure that we only work with and acquire companies that have exceptional talent on all levels that can complement the skillset of our company. And that way we’re looking from a synergistic standpoint for people that can come in and be a part of our organization over the long term. We are not looking to find synergies to reduce human capital and then reduce the SG&A (selling, general and administrative) line.

Second is distribution. We expect that cannabis will become a global trade over the upcoming decade, and we want to make sure that we set up the distribution pipeline for all of the categories of products that we’re playing in.

And then, third, revenue-producing companies. We want to make sure that we only acquire companies that are generating revenues and have a path to profitability over the short term.

TL: Why do you think human capital should be a guide to successful cannabis companies’ M&A strategies?

LM: If we want the legal cannabis industry to grow to become a meaningful contributor to economic growth in the countries or the regions of the world that it operates in, it has to be filled with successful, well-rounded individuals who know operations, who know finance, who know marketing, who know branding. The transition to executives who have trajectories of working for well-rounded companies and know how to operate is what’s going to help take cannabis and cannabis companies to the next level, including Flora Growth.

TL: Can you tell me a little bit about the acquisition of Vessel Brand—what attracted Flora Growth to Vessel’s portfolio?

LM: I think it’s a perfect example of the foundational tenets of our M&A strategy. Vessel has a small team with a very tight SG&A, very talented in branding, marketing and design, designing some of the best quality products in the industry in terms of cannabis consumption and delivery devices. Vessel Brand is developing incredible experiences for their consumers. And that translates into revenue generation and revenue growth.

Vessel also has a very robust e-commerce channel and very strong relationships with MSOs that will likely be significant players from a distribution standpoint for Flora Growth’s portfolio of products. They checked all the boxes.

TL: How did location play a role in the Vessel transaction with the company’s home base in California?

LM: They complement our geography. Flora Growth now has set our foothold in Florida, and we certainly will look to expand our operations and distribution in Florida over the short term. But we needed something in California so that we can play on both coasts in the United States and become a true North American player. Now we can play with the big growers and MSOs that are coming out of California—big state, biggest economy in the industry, clearly was an important part of our decision making.

TL: And as you add more pieces to the puzzle, the synergistic equation become more complex, correct?

LM: Yes, you’re absolutely right. Our next M&A target has to fit in with Vessel and other core Flora Growth organizations. We want to make sure that whatever piece of the puzzle comes in fits nicely with all the other pieces.

TL: When you’re doing your due diligence for different companies, how much of the deal are you looking at on paper versus going out getting a boots-on-the-ground look at the operation?

LM: You have to go out there. So, for the Vessel transaction, I traveled to Carlsbad (California), spent a significant amount of time with the team there, getting to know the team, getting to know the offices, their operation. You can only sense that and feel that if you’re there. That interaction allows you to determine the action plan needed to fully integrate that company for a successful transition.

TL: And what does your Tonino Lamborghini licensing agreement to enter the beverage market entail?

LM: Tonino Lamborghini is a luxury brand. They’re renowned all over the world. We’re one of the few companies that have made a move such as this one, and it solidifies our position in the industry, but it also shows the appetite that consumers have for cannabinoid-infused products. We have realized that over the last 12 months that the food and beverage industry is adopting very rapidly with cannabinoid products, and ingestibles are growing rapidly. These types of partnerships are going to ensure that cannabis goes mainstream, that it takes some spots on a normal retail shelf, and it will ensure that the cannabis trade becomes a worldwide trade.

TL: Although Tonino Lamborghini is an Italian company, Flora Growth plans to use the licensing agreement for its brand in the U.S., correct?

LM: Yeah, that’s correct. We have rights through North America, and we’re launching with three coffee beverages. They’re beautiful cans—cold-brewed coffee beverages with CBD and CBG molecules in them and with great flavor. We’re manufacturing their products, and then we’re distributing them. But they’re under the Tonino Lamborghini brand.

TL: Do you think it’s unusual, this type of licensing deal that Flora Growth was able to secure with Lamborghini?

LM: Rather than unusual, I would call it innovative. I want you to imagine going into a convenience store and opening up a refrigerator and seeing a can of energy drink, you know, Monster, Red Bull, whatever. And then you’re going to see a beautiful, black Tonino Lamborghini can, cold-brewed with CBD. That’s the power of a brand. That’s the power of an experience.

TL: Why do you think 2021 has been such a banner year for cannabis M&A activity?

LM: There’s been a period of companies overinvesting in infrastructure and underdelivering in revenues from 2018 to 2020. And those companies started to become insolvent. Those companies started to become cash strapped and were dramatically reducing the size of their operations. And that led to a period of consolidation that I think will only continue to accelerate into 2022. There’s a lot of companies out there that are doing a great job, but in order for them to get to the next level, they need to partner up with somebody that has the infrastructure, or they need to partner up with somebody that has the cash, or they need to partner up with somebody that has the executive team to help them get to that spot.  

TL: When you’re a global company on the international market, what factors do you have to consider about possible M&A deals that perhaps a U.S.-only company wouldn’t have to worry about?

LM: All the macro variables are dramatically important: geopolitical situation of the country, how the government feels about the industry, their regulatory environment across every single one of the industries in which cannabis can be disruptive. The supply-chain considerations and the cultural considerations have been a big factor for us with regard to how we take our company that is mostly North American and mostly South American, and then blend it in other cultures and schedules in other geographies of the world. So, you have to consider all those variables.

TL: What do you think the M&A landscape will look like if the SAFE Banking Act gets passed, or if a broader cannabis reform effort gains traction?

LM: I certainly believe that we are in the early years of cannabis legalization and that the growth curve of this industry is just at its beginning stages. The SAFE Banking Act is the first truly meaningful step toward opening up the cannabis industry. It allows companies, just like Flora, to access normal banking instruments, and those normal bank instruments would make it exponentially more profitable for companies to operate in this industry. But it would also give them easier access to capital that will allow them to dramatically expand and execute on their plans, including M&A.

I think if the SAFE Banking Act gets fully passed, you’re going to see an acceleration of those M&A transactions. And you’re probably going to see a path toward broader reform. I think that’s going to be incredibly meaningful in terms of growth for this industry.