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This Niche Small-Cap Pot Stock Just Made a Game-Changing Acquisition

Sean Williams, The Motley Fool

The marijuana industry is transforming before our eyes and quickly maturing into a high-dollar industry, generating close to $11 billion in licensed-store sales in 2018. The duo of Arcview Market Research and BDS Analytics foresee more than $40 billion in worldwide legal pot revenue by 2024. Furthermore, by the time 2030 rolls around, the legal cannabis industry could be generating a whopping $75 billion in annual sales, according to Wall Street investment firm Cowen Group.

There appear to be numerous ways for pot companies to make money, albeit most of the focus has been on North America and, in general, producing as much marijuana or cannabidiol (CBD) derivatives as possible. This is why top-tier producers like Canopy Growth and Aurora Cannabis have been awarded the largest and second-largest market caps in the cannabis industry, respectively.

But there are other intriguing ways for marijuana stocks to capitalize on this growth, and niche small-cap company Flowr Corp. (NASDAQOTH: FLWPF) plans to show investors how.

An up-close view of a high-quality flowering cannabis plant.

Image source: Getty Images.

Flowr chooses quality over quantity to separate itself in an increasingly crowded field

Flowr isn't your typical Canadian grower. Rather than focusing on quantity, like many of its peers, the company's Kelowna campus in British Columbia has been entirely focused on quality. When the build-out of Kelowna is complete and fully planted, Flowr will likely be generating 50,000 kilograms a year. That's not a lot of cannabis, relative to the more than one dozen individual, joint venture, and royalty players capable of more than 100,000 kilos of annual output at peak production.

But there's a big difference between what Flowr is growing and what the company's peers are able to deliver.

Flowr's use of genetics, and its partnership with Scotts Miracle-Gro subsidiary Hawthorne Gardening that has the duo testing lighting, soil, nutrient, and hydroponic solutions designed to improve yield and efficiency, put this company in a class of its own. Flowr is already expected to yield 300 grams per square foot at Kelowna, which is about three times higher than the expected industry average yield, and has plans to work toward boosting this efficiency to as high as 450 grams per square foot. At 231 grams per square foot, OrganiGram Holdings is the only major grower even within a stone's throw of Flowr's production efficiency at Kelowna.

Perhaps even more important is the fact that Flowr is focused on producing ultra-premium and premium-quality cannabis. The market will soon be overwhelmed with discount and average-quality cannabis, but competition among ultra-premium developers is minimal. That means strong pricing power, as evidenced by the company's rising per-gram price for dried cannabis in its most recent quarterly report.

Although Flowr does have planned outdoor grow sites at Kelowna, most of which will be used for extraction purposes (e.g., oils, edibles, vapes, concentrates, tinctures, and so on), it's this focus on premium-quality cannabis that separates it from the pack.

A hand holding a cannabis leaf in the middle of an outdoor grow farm.

Image source: Getty Images.

Flowr just announced a game-changing acquisition (and got clobbered for it)

On Monday, Flowr made its latest niche play -- one that few folks probably saw coming.

The company announced a cash-and-stock deal to acquire the 80.2% of outstanding interest it doesn't already own of privately held, Portugal-based grower Holigen. Flowr initially took a 19.8% stake in Holigen this past December for 6 million Canadian dollars (about $4.55 million). 

What makes this acquisition so intriguing is two factors. First, this is all about appealing to an overseas market. Holigen's grow farm is located in Portugal, giving Flowr access to the numerous markets in Europe that've legalized medical cannabis in some capacity. As a reminder, even though the recreational market is much larger than the medical cannabis market, medical pot patients tend to use marijuana more frequently, buy product more often, and are far more willing than adult-use consumers to purchase higher-margin derivatives. That makes focusing on Europe's medical-only market a potentially high-margin venture.

The second factor that makes the transaction exciting is that it technically makes Flowr a major marijuana player. The Aljustrel outdoor-growing facility at Holigen spans 7 million square feet and will be able to produce more than 500,000 kilos of cannabis when fully operational. There are only two companies currently slated to grow more than 500,000 kilos a year -- Aurora Cannabis and Canopy Growth -- meaning Flowr is about to join some exclusive company.

Understandably, outdoor-grown cannabis isn't typically high quality, and yields tend to not be as impressive as climate-controlled indoor settings. But ultra-premium quality isn't what Flowr is after with Aljustrel. Instead, the company plans to use most of the crop for its extracts, which can be transformed into high-margin derivative products for the European medical marijuana market. 

A visibly frustrated stock trader grasping his head as he looks at six different monitors showing stock charts and numbers

Image source: Getty Images.

While you might think Wall Street would be thrilled with this deal, it wasn't. And that's because Flowr needs to raise capital to make it happen, as well as complete its Kelowna campus build-out. Just a day after unveiling its game-changing acquisition, Flowr announced a public offering of CA$125 million worth of its stock, with an underwriters' option to purchase up to an additional 15% of the common shares sold. All told, existing shareholders could be looking at share-based dilution that nears 15%, which caused the company's stock to be creamed. 

Ultimately, I view Flowr's overseas push as a major positive for the company, although it's unclear just how quickly it'll be able to secure deals in Europe for its derivative production from Holigen. However, the key to success is going to be for investors to have patience. Even though this dual-pronged approach of premium-quality flower in Canada and outdoor-grown cannabis for derivative sales in Europe should be a substantial moneymaker for Flowr over the long run, it's not out of the question that the road to riches could be rocky as the company funds and completes its projects.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends OrganiGram Holdings. The Motley Fool has a disclosure policy.