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What’s Killing Cannabis Multi-State Operators?

Peter Dougherty, CEO Orion

In early April 2020, a US based Multi-State Operator (“MSO”) defaulted on interest payments on its approximately $160M in debt. This ‘symptom’ is a microcosm of the underlying ‘disease’ from which MSOs are suffering. What's the real killer here?

According to financial news reporters, this MSO is fighting with its creditors as the company defaults on its loan interest payments. When this MSO defaulted, the Wall Street faction that became ‘Green Rush’ Cannabis company operators began fighting with their old Wall Street comrades over loan deal terms. The fight became so heated that an unsecured creditor started talking to the press, tanking the MSO’s stock and making it impossible for the MSO to borrow more money to fuel the company engine.

Sure, this MSO is burning through cash, primarily because its business focus and benchmark of success was on amassing production and retail assets. There were flaws in that strategy, but this MSO is hardly unique compared with other Multi-State Operators using the same strategy. . The "Kool-Aid" Cannabis producers have been drinking is the same flavor that tech companies served and investors drank in 2001, using a "Build it and the value will come" strategy. That failed strategy in combination with internecine Wall Street fighting would certainly be a toxic cocktail for any company. But is that the real killer ? Nope, it's just the tip of the iceberg.

The harsh reality is that many MSOs are just now learning how to produce Cannabis at scale. The absence of industry experience in large scale Cannabis cultivation and the failure to manage their business to KPIs (Key Performance Indicators) is a core vulnerability. Had this MSO spent $5M on standardizing production the company could have increased production by upwards of $50-60M annualized in 2020. KPIs are not magic formulas, but are fundamental to running a successful Cannabis cultivation business. To be successful, these operators must focus on . . .

Sustainability . . .

Having a business plan that is designed to attain profitability based on current financing, not just acquire more production and retail assets and burn capital. Ask the former CEO of MedMen how that business strategy worked!

Standardization . . .

Getting the most production out of the production systems they already have. Scaling production by standardizing and optimizing existing cultivation systems using data to drive continuous improvements, measure KPIs to drive accountability.

Accountability . . .

Managing the business to and reporting to the market on KPIs - such as grams per sq foot, cost per gram and grams per kWh, along with revenue and margins. These are the measures of cultivation success, not store numbers or how many facilities you have open.

If you are an investor in a Multi-State Cannabis operator, ask them one question: What are your KPIs? If they can’t answer that question, run. Or you can introduce them to Wall Street reporters so they can add to their stack of pending stories of Multi-State Cannabis cultivators fighting with creditors. Though it may seem like a flashy story, ultimately it's not what ails them . . . lack of accountability using KPIs is the disease that is ultimately killing them.

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