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Flowr Corporation Could Match Canopy Growth Production If It Executes

Flowr (FLWPF) has been taking a beating lately, and now appears to be in oversold territory.

Since it went public in September 2018, a lot of things worked against the company, including the stock market correction that happened in the fourth quarter.

Consequently, its share price predictably got hammered. The positive is after that period of downward pressure, the company rebounded nicely, and I believe it has the potential to do so once again, even though its share priced has plummeted over 30 percent over the last month.

Last quarter's performance

In its latest earnings report Flowr showed that it had grown production by 8 percent over the previous quarter, coming in at 279.8 kilograms. In the reporting period it sold 211.2 kilograms. At face value it appears to be a negative performance when compared against prior sales, but the company prior sales of 406 kilograms in the fourth quarter included inventory buildup from previous quarters.

As for sales per gram, Flowr was able to improve sequentially by increasing the amount from C$7.08 per gram in the fourth quarter to C$7.70 per gram in the first quarter.

Once the smoke cleared in December the stock jumped from about $2.20 to $3.59 per share. That boost in share price came after the 14-day RSI dropped under 30.

Negative catalyst

One major thing has recently put downward pressure on the share price of Flowr, which was the withdrawing of its $94 million offering. 

Not all the news was bad though, as the company did announce it had made an agreement with underwriters led by GMP Securities to sell 10.61 units at $4.10 each, for a total of $43.5 million.

The units represent one common of Flowr and one common share purchase warrant, according to the company.

Each warrant includes the option of buying one common share of the company at a price of $5.00 per warrant in the 24 months after the closing of the offering. If exercised, it would bring the total raise to $50 million.

The primary use of the funding will be to help finance the acquisition of Holigen Holdings Limited and build out production and cultivation facilities afterwards.

August 8 is the expected closing date.

Holigen Holdings Limited 

Flowr announced in June 2019 that it was going to acquire Holigen Holdings Limited. This has the potential to be a big play for international expansion, as well as a huge increase in its production capacity, which when fully operational, would match the approximate 500,000 kilograms in annual production that Canopy Growth (CGC) is moving toward.

The planned facility named Aljustrel, is projected to be operational in the second half of 2019, and will be a 7 million square foot facility with the capacity to produce over 500,000 kilograms annually, as mentioned earlier.

If it's able to execute and meet these guidelines, it would place Flowr only behind Aurora Cannabis is production capacity as the market stands today.

Located in Portugal, it has the potential to produce among the lowest cost cannabis in the world, based upon climate and the the country's inexpensive workforce.

It also provides access to the highly profitable cannabis market in the EU once it receives a license from Portugal. This would significantly bolster its international footprint.

It is also building a network of partnerships with distributors serving Germany, Ireland, Poland and the UK. Once it starts producing some serious product it should have things in place to scale it fairly quickly.

Conclusion

I think Flowr is oversold at this time, based upon it dropping below a 14-day RSI of 30, and the market not seeming to be pricing in the future potential of Holigen Holdings Limited.

With a probable short squeeze approaching and the negative news already priced in, it appears in the short term Flowr could be a solid trade.

Further out, it has the potential to become among the top 3 cannabis producers in the world. The challenge there is once it achieves that distinction, assuming it executes on its strategy, what will the market in the EU in particular look like with Aurora Cannabis having such a strong position and lead in that market, as well as some smaller players.

Flowr is a late comer to the cannabis market, but it has taken the right moves to give it a chance to grow significantly in the years ahead. Now what it has to do is prove it can generate enough revenue and eventually profits, in order to give it time to grow its business without burning its cash.

If it can do so, it will reward long-term shareholders very well. It could do the same in the short-term for reasons already mentioned, but it isn't likely to sustainably hold once its share price enjoys a good bounce.

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