By Tom Hymes
Founded in 2009, Colorado-based multistate operator LivWell Enlightened Health has over the years established itself as one of the industry’s more proficient players by utilizing the skills and grit that its Kiwi founder and longtime Colorado resident John Lord brought with him from other highly regulated industries into the nascent cannabis industry. As he explained in a 2016 CBE profile, when faced with equally embryonic state regulations that stymied anything but organic growth for LivWell and other Colorado cannabis companies, Lord and his team beat the odds by doggedly expanding the company’s footprint throughout Colorado before expanding into Michigan, building a reputation along the way as one of the industry’s leading vertical operators.
Recently and notably, LivWell and Chicago, Ill.-based PharmaCann announced a merger of sorts that upon closing will create a combined entity that operates “approximately 60 dispensaries and 11 cultivation and production facilities across eight states,” per a company release. States in play include Colorado, Michigan, Massachusetts, New York, Illinois, Maryland, Pennsylvania, and Ohio. It is not the first big deal Lord has successfully negotiated in his storied career, to be sure, but it certainly signifies a defining moment – a changing of the guard, if you will – in what are still the early rounds of this long journey for LivWell and Lord, who sat down with CBE during the recent MJBizCon in Las Vegas for his first interview since the merger was announced.
Lord is generally known as having a stellar track record getting his products into Big Retail, like Walmart, Target, and many others, retailers that are notoriously difficult to work with in terms of the utter efficiency they demand and the unforgiving nature of the terms they impose. But they also are the definition of scale, and the ability to scale and maintain quality is what separates the winners from the losers in Big Retail. The mere mindset to scale, which of course is also what LivWell is all about, offered a distinct advantage to the company, especially considering the many challenges facing cannabis start-ups during Colorado’s early Wild West days.
“I leased a commercial space to a startup cannabis company,” he said, recalling his very first foray into cannabis. They were the traditional black-market guys, and I think they had no real interest in giving that up completely. Basically, their style and everything else did not change and come into business, and the classic [situation] was that anytime you sort of tried to mentor them and say, you know, hey guys, it was like, ‘Dude…’ – it always started with dude – ‘…you don’t understand weed, and you don’t understand our business,’ and I’d say, ‘Well, maybe I don’t, but it’s not me coming into your business. It’s actually your business coming into our legal real world of business, and unless you can make that transition, you’re all friggin’ toast.’ And sure enough, that’s kind of the way the whole industry has really played out. I’m speaking in broad strokes, but largely the black-market guys just could not make that transition, and still to this day a lot of them have one foot in each business, and that’s a recipe for disaster because they’re building or trying to build value in this legal business, and they’re jeopardizing the whole damn thing by still having a toe in the old ways, so to speak.”
None of that interfered with Lord. “We got on with it and built from one store and a very small grow situation,” he said. “I think the biggest transition for us was, we’ve never had the master grower-type situation. I don’t believe in it at all to this very day, even more so now than before.” Did he think it was some kind of a crock? “A total crock, and the fundamental reason [why] is they call themselves artists. The master grower is an artist. Okay, but by the sheer definition, art does not scale. Manufacturing scales; art does not, and that’s a basic issue for the master grower situation. In order to manufacture a product that’s consistent, you need consistent ways of doing things and not come in in the morning and feel, well, I think this and so change x and y, because you will end up with a different result and not a consistent product. And moving from my past into very regulated market – child-safety seats – suited the mindset of cannabis because it’s a highly regulated market. So, instituting SOPs and things like that at a pretty early stage in the development of the industry gave LivWell a little bit of a jump on everybody else.”
The methodology they used in place of master grower orthodoxy was right in front of them, as well. “Yeah, the methodology was simple,” said Lord. “There’s the standard sort of an org chart and that sort of thing, and possibly an R&D department, which we formed, and things had to be legitimately tested and trialed before they went into production, just as we were doing in baby product; basically, I cut and pasted my org chart over and just repopulated it with different people, but that was sort of the extent of it.”
Grows were strictly indoor for LivWell from the beginning. “Indoor is the only way to go; we’ve never veered from that,” he stated. “When people were sweeping up greenhouses, we were like, this is this is a doomed-to-fail situation, and it has been. By and large, it has been.
“They are too hard to control to the specifications that we need to grow cannabis,” added Lord when asked why greenhouses are unworkable. “What everybody seems to forget about is the genetics. This will be the next big step in the evolution of cannabis, but we inherited genetics that had been nurtured for 50 friggin’ years in a closet, literally a closet. In the meantime, the good old commercial tomato plant or corn or whatever has had 50-60 years of breeding to breed out powdery mildew and pestilence and stuff like that. You’ve got a far hardier commercialized plant. You can put that plant in a greenhouse because it has been bred to certain tolerances and can stand a jump in humidity without PMing out and that sort of thing. A cannabis plant can’t; it’s just not bred yet to that sort of tolerance, so you’ve got this weak plant that hasn’t had that breeding, and you go throw it into a greenhouse or whatever without the breeding behind it, and a few degree changes in humidity or temperature in there throws the whole thing off.”
In Lord’s line of business, the risk of crop loss was too great, the margins too thin, to justify taking a chance on greenhouses. “If you’re growing for biomass for production purposes it’s quite acceptable to have a bit of crop loss and a bit of PM,” he explained. “That can all be mitigated through the manufacturing process and cleaned out of the product, but 55 percent of the market is still flower. Everybody said that once production ramped up, it would be at the expense of flower, and we watched that transition take place, and it got all the way to 55 percent flower – and it’s true in other states too within a point or two – and then it just leveled off and that was it, and it’s been level for several years now. That means that the majority of your production is a flower product, not biomass, and out of that 55 percent of flower we get enough biomass to largely account for the production side of the business anyway. But look, as soon as a market starts to mature a little, you can’t give away outdoor flower. Every year in Colorado, we try to, and that product can be $30 an ounce cheaper than indoor, and we still can’t sell it, and so, the retail market has spoken. Get over it, you know? At the end of the day, we’re a customer and patient-centric company, and our cultivation has to respond to that patient’s or customer’s needs, and that is high-quality indoor flower.”
280E
Lord also has been a longtime critic of the punitive federal tax, 280E, which prohibits cannabis businesses from deducting business expenses other industries take for granted, and which takes an inordinate toll on mom-and pops. “Here’s the issue,” explained Lord. “Let’s just talk wine or something like that. You can have the big supermarket-sized alcohol outlet down the road, and then up the street a little bit there’s a little corner boutique wine shop, the two are totally different animals, right? You walk into the one and push around a shopping cart and load it up for a month or so with booze of some description, but don’t bother trying to find somebody to talk about a decent bottle of wine; there’s nobody in there to help you. But if you go down to the corner – just below my house is a goofy little wine store, and the guy there will tell you all about the $100 bottle of wine and why it is the bottle that’s going to impress this evening. And so, it’s a different buying experience.
“I believe that both should exist in cannabis and the problem is not competition or anything else. The problem is 280E taxation,” he added definitively. “That little mom and pop is getting totally taxed out of existence right now with 280E taxes. This is a high-volume, low-margin business, especially in states like Colorado and Washington state where it’s commoditized down. You’ve got to then do the volume in order to justify the business itself, and this is why you’re seeing this vast amount of consolidation; it has to happen, and it’s not necessarily direct competition from the guy down the street. The reality is that it’s 280E taxation. It’s a punitive tax, and so then you need this larger volume to drive that very small profit margin. I know everybody is publicly out there [claiming] that all the big guys are pushing out the little guys, but it’s actually not that way at all.”
Were 280E to go away, the situation would ease, said Lord, but he does not hold his breath in the hope it will happen soon. “Yes, I think that [if repealed] that corner boutique wine shop profile can exist, and that mom-and-pop can make a reasonable living through doing your boutique strain that took a little extra time to grow and was hand-cured. But, at the moment, those issues don’t exist, and I feel very, very strongly also that this is putting vast pressure on all of the social equity initiatives also, because, with 280E taxation, even though well-founded and really well-needed, we’re setting those programs up for failure and those people up for failure, because they are coming in new to an industry that’s a very tough industry, and yet they have this image – because it’s a cash business at the retail end – that we’re rolling in dollars. And superficially, yes, those dollars are coming in, but literally I used to take most of them in duffel bags to the IRS, and that’s where that money actually ends up.”
The actual tax burden is greater than most people realize, he added. “Because it’s on your gross retail dollars, which is where you’re actually paying it, so at the retail store end, your rent, your lease is not tax deductible, and of course, the highest cost of the lot, labor, is not tax deductible, so nothing at retail is tax deductible. You’re paying taxes on your retail dollars, so the effective tax rate is in excess of 80 percent, because that’s how the math works. And if somebody is discounting below 50 margin points or 100 percent markup, it gets even more punitive because there’s not enough actual net dollars – you can be in a situation where, if you were discounting down at about 30 margin points or something like that, you will be paying more taxes than you made in money, effectively like 110 percent taxation.”
Margins are thin in the best of circumstances. “There’s about 6 percent [profit] in the job if you’re holding those 50 percent margins,” said Lord. “If you go below that, there’s nothing left.
“A dozen years ago, I said, ‘You know, I think we could have some form of states’ rights, or some form of federal legalization within 10 years,” said Lord in conclusion. “Well, that was 12 years ago, gentlemen, and here we still are. So, yes, you can hope for the best, but you must build your business sustainably for the worst, and that is ongoing 280E punitive taxation, and you can’t live in that hope [of change], because if LivWell had lived in that hope 12 years ago, we’d be long gone by now.”
Another impediment LivWell had to overcome was the inability to take outside investment, a restriction unique to Colorado and other similarly minded states. “Colorado got off to an early start, but because of state regulation in actual fact it really inhibited the Colorado companies to stay ahead,” said Lord. “What we did was, Dean Heizer, my chief counsel at the time, worked for three years to have the regulation changed in Colorado, and, if you’ll remember, we got it over the line, and John Hickenlooper vetoed that down. That was the death-knell in my mind to the Colorado companies getting the jump, because we could not go out at that early stage and do the MSO route when it was running hot and bring in the necessary capital. That was really the only way forward at the time to garner cheap capital to grow rapidly, and that’s where the MSOs got the jump on the Colorado companies. That’s why you see to this very day that Colorado companies are having to go the other way and sell or merge into those greater entities.”
I asked if the experience had a lasting impact on the company in the sense that they always felt a step behind? “Totally,” he replied. “That veto was at a critical time, business is all about timing, and that was our time. Unfortunately, it went a different way on us.”
Lord may have been upset because LivWell was denied its shot, but he wasn’t about to give up, even in a situation where the company was “cash strapped like all the Colorado companies, when others were able to sort of go out and put flags up in other states at the time and we couldn’t get there. This was through 2018-19.” Instead, he added, “We could only do it organically. LivWell is good for another state every two or three years, because we’ve got to do it and then take a breath, and then actually organically earn enough money to then go and do another state.”
It is an excruciating process that everyone has to manage. “Michigan was two years in licensing and approvals and 18 months to build the thing,” he said. “You’re talking three-and-a-half years from the start of a project to the time when you can start production.”
Merger!
Regarding the merger with PharmaCann, which is actually an acquisition by PharmaCann, according to the companies’ joint announcement, Lord was obviously effusive about the outcome while remaining relatively tight-lipped about the details, despite CBE’s nosy inquiries.
“Look, it was a healthy transaction from both sides,” he said, when asked about a dollar amount. “It was a good healthy negotiation. We are very pleased I think on both parts, from both sides of where those transactions ended up for us both, because firstly, although money is important, it’s never actually been my main driver in my entire business life. Money is a byproduct of what you enjoy doing, and it has never been a primary driver in my business decisions. It’s an important part of the decision, but it’s not the product.
“I enjoy building things, that aspect of it,” he continued. “I enjoy the business development and building a company, and we built this from the ground up. And we have a very, very solid base of very, very good people that I work with every day that make me look good. And that’s really, really important to us – the people, and look, I wouldn’t have got a mile down the road on this thing without a very good team. And so, at this point in looking at potential suitors over the last couple of years, we turned over a lot of rocks, and it had to be a good, combined home for us, a good future for LivWell, and a good future for my team, and that was sort of the most important thing to us, because we’ve seen mergers and things like that go awry so many times.”
Problems often arise when corporate cultures clash. “They have to fit,” he agreed. “We really connected with the PharmaCann management, and that was of primary importance to me. And it’s been that way for the majority of this year, going through the due diligence. You know, we’re really looking forward to the combined entity because there was some very, very basic synergies and that is that PharmaCann financially is way better connected than we are. They have really set this thing up for winning from a financial point of view. They have significant financial backing.”
Was he referring to Cronos, which has an option to acquire a 10 percent stake in PharmaCann? “Yes, and other strategic investors, and so that really set this thing up well from a financial point of view, and that is really their strength,” he said. “They have the management team that in other businesses has [public equity] experience, LivWell does not, and quite frankly, going public on our own kind of scared the shit out of me. We’ve always been private, but these guys have that experience. On the other hand, LivWell is publicly known to be a very, very good operator in this space, and that’s the core strength we’re bringing into PharmaCann, and it’ll be LivWell’s operational expertise that goes through their cultivation [sites], and things like that.”
The deal is expected to close in January if regulatory approval goes as planned, and after that it will be off to the races, albeit in a manner different from most other so-called mergers. “Both companies go up to a mothership, which will be PharmaCann,” explained Lord. “Above the door, there will be no change. LivWell dispensaries will remain LivWell dispensaries and will continue to grow out and expand as LivWell.”
Does that mean that the branding strategy of the combined companies is to continue having separate products and brands? “Let the dogs hunt, and the data will lead us which way,” replied Lord, uttering what is now my favorite quote of the year. I mentioned that this arrangement seems to be an anomaly in the industry.
“This was {PharmaCann CEO] Brett Novey’s vision,” he said. “I embraced it totally, and I think it’s going to be very healthy and positive for the combined company.”
I am a tad confused and mention so. If LivWell lives on and Lord is moving over to the PharmaCann board, who is running LivWell? “Actually, I will succeed my position to my son,” said Lord, referring to the company’s current COO, Michael Lord. “It’s time, anyway. Look, he’s way smarter than me, and he’s done one hell of a job as COO. So, it’s time, and I’ll take, yes, a board position, but also remain very active in business development and ensuring that the LivWell SOPs are adopted overall at the cultivation [sites], etcetera, within the new entity.”
Now the shape of this new more formidable entity begins to take shape, along with Lord’s all-important role going forward. “The importance of the role will be to ensure that the combined company flourishes, which really is the way to go,” he said. “We have huge opportunities with regard to growth, as we will see in the more limited licenses that PharmaCann currently has, and there’ll be of course future M&A we’re already working on. And so, there’s going to be a vast amount of work stitching that together to make it run cohesively, and I intend to fully support Brett in that undertaking.”
On any specific M&A activity in the works, Lord reverted to tight-lipped executive. “I’d rather not speak of future M&A but for the fact that we believe that once we move into a state, we’re not into the concept of randomly putting flags down,” he said. “In order to make a state profitable, one little store somewhere doesn’t cut it. You have to fully build out that state.”
I asked if this all a route to public markets. “Most definitely,” replied Lord. “PharmaCann is well on the road towards IPOing; LivWell was, too, but independently, we would be the third page down, and it’s a retail public market, so institutionally there’s not much investment at all because it can’t legally be there. So, if we’re halfway down the third page of one of these, we’re too small on our own, but combine us and we’re in the top five. That’s where we have to be to trade.”
Our time was just about up, but we wanted to know if Lord had anything to add on the occasion of a deal that, if not the culmination of his years building LivWell into a leader in the industry, is certainly an exciting new stage in its journey to wherever. “In my 12 years of this, we’re still just as excited as the first year,” he said. “The industry is still a toddler, but for all of its trials and tribulations, it is still an exciting place to do business. It has such a future in front of it, it still excites me every morning to get going. It’s been incredible to watch the general acceptance of cannabis increase through society, and the stigma of it fade away, and just watching the patient and customer acceptance of the product. It’s an exciting place.”
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