Once-high-flying Flow Cannabis Co. falls to earth amid woes, offering lesson for others

By Jackie Bryant
January 25, 2022 – Updated January 25, 2022 

By vowing to help underground marijuana farmers in the Emerald Triangle become legal growers, Flow Cannabis Co. became the vanguard of the historic Northern California growing region.

The marijuana distributor, which launched in California in 2015, was an early and vocal advocate for small growers in Humboldt, Mendocino and Trinity counties.

The company also was a major buyer of their Emerald Triangle cannabis.

Within a few years, high-flying Flow Cannabis Co. – often referred to by its flagship brand, Flow Kana – seemed poised to reshape California’s cannabis industry:

·         The company bought a large Northern California wine estate in 2017. The goal: Transform the historic property into a “cannabis institute” catering to small-batch marijuana growers.

·         Top executives envisioned building a cannabis museum, dispensary and “welcome center for the Emerald Triangle.”

·         Top executives aimed to build “the world’s largest cannabis supply chain,” according to a 2018 investor presentation viewed by MJBizDaily.

·         The targeted markets, according to the company’s pitch deck, were ambitious: “the massive California market and (the inevitable) national market.”

·         Investors clambered aboard, shoveling nearly $200 million into the company in 2018 and 2019.

In addition, parent Flow Cannabis Co. set out to prove that small is beautiful when it comes to marijuana.

It was a clear shot at “big cannabis” and today’s multistate operators.

Michael Steinmetz – a co-founder, former CEO and current chief servant officer of Flow Cannabis Co. – previously likened the company to household brands such as Sunkist, Uber and Whole Foods Market, which all enlist a model where a centralized entity aggregates and supports small operators while sharing the profits.

“We don’t see large-scale cannabis as the future of cannabis,” Steinmetz told MJBizDaily in 2019.

“We see the model as aggregating all of these small farmers to collectively bring massive amounts of craft cannabis to the market.”

But those lofty goals are no more, and Flow Cannabis Co.’s future is uncertain given layoffs, executive departures and tight funding.

A spokesperson issued a brief statement Monday confirming yet another round of layoffs – at least the company’s fifth since March 2020 – underscoring the business’ precarious financial position:

“Due to the current state of the cannabis market in California, we have decided to implement a reduction in force.”

The spokesperson declined to confirm either how many employees were let go or how many remained on staff as of Jan. 24.

Further accelerating Flow Cannabis Co.’s fall was the fact its high-stakes wager was predicated on the federal government legalizing marijuana.

That, of course, hasn’t happened.

Ultimately, Steinmetz ripped up his company’s business plan amid a fallout with contract growers over the price of marijuana.

Flow Cannabis Co. was then forced to do something that ran counter to its original business plan: grow its own marijuana.

Lessons to be learned

What happened?

Flow Cannabis Co. fell victim to many of the same factors that have undercut cannabis and mainstream businesses alike.

Its plight offers lessons for cannabis industry executives and investors – as well as small marijuana farmers – by shedding light on key issues that can trip up a company, an investor or, in this case, an entrepreneur.

Think overly ambitious goals, ill-advised assumptions (Uncle Sam would legalize marijuana sooner than later), tumbling wholesale marijuana prices and failure to read contracts carefully.

Steinmetz, who was recently elected to the board of the Sacramento-based California Cannabis Industry Association, largely blames the state’s “broken” regulatory system.

It’s a view echoed by other industry executives, who point to California’s high taxes and a thriving underground market that undercuts legal growers and retailers.

And what about the small Emerald Triangle growers who partnered with Flow Cannabis Co.?

Many abandoned the company over a contract dispute, although some have since returned.

Relations, in some cases, turned bitter.

Several farmers told MJBizDaily they felt “used.”

“It’s a tricky one for me because I was such a beneficiary of the various aspects of being involved with Flow Kana. I was at the center of it,” said Casey O’Neill, co-owner at HappyDay Farms in Mendocino County.

“At the end of the day, I felt like they used the farmers and the product that they got to be able to attract more investment capital.”

Other issues have cropped up amid the cannabis industry’s growing exposure to climate change.

Last July, Flow Cannabis Co. admitted an employee was responsible for a fire that burned 80 acres in Mendocino County.

The accidental blaze – which broke out during a particularly destructive wildfire season – forced 250 people to flee and destroyed three homes.

The incident further soured relations with the surrounding community and Flow Cannabis Co.’s local business partners.

Future uncertain

Today, Flow Cannabis Co.’s future is up in the air:

·         The business recently weathered layoffs and executive departures, including its president, chief operating officer and a co-founder of the company as well as the interim CEO. The company’s current workforce numbers “around 130,” Steinmetz said before Monday’s layoffs, down from a high of 208 in 2018.

·         Once-enthusiastic investors – including some large players who declined to be identified – have cut ties with the company.

·         The company faces a capital squeeze that sources attribute to overspending, among other factors.

Steinmetz conceded to MJBizDaily that Flow Cannabis Co. “made mistakes along the way.”

He also acknowledged that a disagreement last year “with one of our larger investors … drove us to a precarious position.”

The investor, he noted, was able to “block board-approved actions.”

After parting ways with the unidentified investor in the fall, Steinmetz said, Flow Cannabis Co. was able to “resume an ordinary course of financing … with a significant amount of the target raise already completed.” He did not provide details.

Steinmetz attributes the company’s struggles largely to California’s regulatory climate for legal marijuana.

“The regulations in California are broken, period,” he said.

Steinmetz also said California’s topsy-turvy marijuana market forced Flow Cannabis Co. to become vertically integrated – rather than rely on dozens of craft MJ growers.

Since there is “no market to expand horizontally,” Steinmetz added, the company is “finding margin” by going vertical.

He added the pivot was “neither by design nor by choice. It was contrary to our original business thesis, but we’re doing it so that the dreams can have even a way of surviving.”

Newer plans include a 12-acre grow site, which was planted in 2021 and harvested last fall.

An October 2021 investor presentation obtained by MJBizDaily indicates the company expected to harvest 30,000 pounds of biomass to be used during the 2021 and 2022 fiscal years.

Heavy rains in late October, however, caused some of the company’s first crop to become moldy.

Flow Cannabis Co. confirmed it destroyed some of the year’s harvest.

‘Great, in theory’

According to Steinmetz, California’s laws were intended to prevent vertical integration by offering a “broken-up” supply chain that licenses each segment of the supply chain, from grower to seller and everything in between.

“That’s great, in theory,” he said.

But the reality, Steinmetz said, is that structuring a market in such a way also increases costs at each level of the chain to the point that retail prices become too high to stay competitive with the state’s robust illegal market.

At the same time, he added, it creates a race to the bottom for growers and manufacturers, who are forced to take steep price cuts to stay competitive with falling retail prices.

Steinmetz feels so passionately about California’s current tax structure that, in November 2021, he wrote an op-ed published in Medium in which he called for cannabis companies in the state to withhold paying taxes. His call to action has since garnered mainstream media attention.

He proposed depositing marijuana tax funds in an escrow account until the state agrees to slash cannabis tax rates.

Steinmetz also said that marijuana retailers paying for inventory on a monthslong-delayed schedule – a common industry practice – have zapped Flow Cannabis Co.’s financial health.

That, in turn, hits the farmers, who are the last in the supply chain to be paid.

In a market with wildly fluctuating prices over the years, the competing priorities have proved a difficult balancing act.

Flow Cannabis Co. once had “close to 800 points of sale in a market of more than 5,000 dispensaries,” Steinmetz recalled of the operation’s heyday during the “medical days of Prop 215.”

“Right now,” he said, “we’re lucky that we hit 300 or so. … None of them are really operating profitably and are going to have a hard time paying you. Only about 150 pay us on time.

“So we don’t service a lot of (dispensaries) regularly.”

To get around this problem, Flow Cannabis Co. launched a direct-to-consumer sales platform in November called Flow Direct.

Difficulties with farmers

Flow Cannabis Co.’s cultivation pivot came after the business encountered problems with its Emerald Triangle farmers.

During the winter of 2019-20, for example, 20 of the business’ 23 contracted farmers parted ways with the company, Steinmetz confirmed.

The farmers cited a pricing discrepancy that required growers to take a lower payout than they were contracted to receive based on unforeseen market fluctuations.

Flow Cannabis Co. offered different prices within a certain range, according to multiple growers who were involved but requested anonymity to discuss sensitive business dealings.

In one company contract obtained by MJBizDaily that is dated Nov. 9, 2019, “Unicorn” AAA flower was being offered for $1,500 a pound down to $1,000 for “Low” AAA.

“Smalls,” which are smaller buds found lower on the cannabis plant that can sometimes be less potent, were contracted at $550.

The lowest price offered was for B-grade flower, at $350.

The contracts provided guidance for grading and explained the standards for evaluating flower.

Included in the contract was a clause that proved fateful for Flow Cannabis Co. and its farmers – a stipulation that the business was not responsible for market-price fluctuations.

In addition, the company did not guarantee it would pay the highest market price available for any cannabis products.

Steinmetz said that during the 2019-20 harvest season, in particular, pressure from the illegal market exacerbated by “shell distributors” distorted market prices to the point that selling in bulk to Flow Cannabis Co. became more profitable for farmers than it was for farmers to manufacture and process flower into jars, pre-rolls and other consumables that are then sold to the company.

For a distributor such as Flow Cannabis Co. – which also acts as a processor and manufacturer but not a grower – that situation put additional pressure on the bottom line.

Company management was forced to cut costs, and so farmers faced a price cut for their cannabis.

“We had to have very, very awkward conversations with the farmers to realign to the price of the market,” Steinmetz said.

New contracts were drawn up in March 2020 and terms were set. Farmers could:

·         Take back their inventory, which was now several months old.

·         Sign the updated agreement for a new, lower per-pound price for the flower.

The revised contract reviewed by MJBizDaily laid out prices ranging from $400 per pound for smalls to $900 on the high end – a steep drop from the $550 and $1,500 respective prices detailed in the November contract.

According to Steinmetz and farming community sources, most farmers took the new price set in the revised contract but then cut ties with the company after being paid out.

That left Flow Cannabis Co. with only three farmers, compared with the 23 who previously supplied the company.

Some of the farmers who initially cut ties with the business later returned, because Flow Cannabis Co. remains one of the state’s largest buyers of sun-grown marijuana flower.

Today, the company said it is back up to roughly 20 contract farmers.

Relations generally are improved.

By contrast, during the 2019-20 harvest season, relations with the farmers were strained.

While the initial contract allowed Flow Cannabis Co. to change wholesale prices as it saw fit, some growers admitted they hadn’t read the document closely before signing.

Others said they read it.

But they expected the company to make good on its initial pricing, because the working relationships had been friendly.

That assumption proved incorrect.

Other issues surface

 Multiple investment fundraising rounds over the years also led to big-ticket projects for Flow Cannabis Co., such as state-of-the-art processing facilities that were never used to capacity, marketing initiatives and events as well as a 2018 trip for the company’s contract growers to Colombia.

Those costs didn’t sit well with many farmers at a time when wholesale cannabis prices were plummeting, and relations between Flow Cannabis Co. and the Emerald Triangle farming community continued to deteriorate.

“The most valued currency in the Emerald Triangle is your loyalty to people,” Humboldt County-based farmer John Casali said. “Your word is your bond here – this is our community, and these are our values. They let us down.”

“This is a community built on trust and handshakes,” agreed one Mendocino County-based farmer who asked to remain anonymous because of a nondisclosure agreement.

The farmer explained that Flow Cannabis Co. tried to get its bank of cultivators to recruit other growers and bring them into the fold, which was not an easy task in a community that is skeptical of “suits and businessmen” in the first place.

“They used us to get investment money,” the farmer said. “Their idea was to get these contracts with 21 farmers with a guaranteed amount of pounds, that’s ‘X’ amount of dollars.

“They went out, raised money on that – their relationships with us – as we get screwed.”

That farmer and others felt insulted that the business engaged in what struck them as corporate cultural appropriation: Flow Cannabis Co. continued to market itself using imagery and language from the unique farming culture of the Emerald Triangle while the farmers the operation relied on were suffering.

That contributed to why many parted ways with the company, the farmer said.

Other farmers believe the company had good intentions, but management choices and market forces led to poor outcomes.

“While they did make some decisions that I can’t agree with – and even to the point where we made the difficult choice to leave – we are forever grateful for the effort and commitment they made to put many small farms on the map,” said Joseph Haggard, manager at Emerald Spirit Botanicals, a grower based in Mendocino County.

“It was a valiant attempt, but it’s hard to scale that fast.”

Jackie Bryant can be reached at jacqbryant@gmail.com.