The Flowr Corp gets a target and rating drop from ATB Capital

ATB Capital Markets analyst Frederico Gomes’s view of The Flowr Corporation (The Flowr Corporation Stock Quote, Chart, News, Analysts, Financials TSXV:FLWR) is wilting, downgrading the company to a “Sector Perform” rating from “Outperform” while slashing his target price from $0.25/share to $0.10/share for a total return of 54 per cent in an update to clients on Friday.

Headquartered in Toronto, The Flowr Corporation cultivates, produces and sells cannabis in Canada, while also having operations in Europe and Australia.

Gomes’s updated analysis comes after The Flowr Corporation released its third quarter financial results on November 29, which came in below ATB’s expectations.

“The company is making progress on cutting costs and improving its product portfolio,” Gomes said. “We believe that more tangible results from these initiatives will show in 2022e; however, given the Company’s strained capital position and the uncertainty in the Canadian and international markets, we are moving to a neutral stance on the stock.”

Flowr’s financial results were headlined by $2.5 million in revenue, which came in below the $3 million projected by ATB despite being a sequential growth of 13.6 per cent. The company’s adjusted EBITDA also represented a miss, as the reported $5.9 million loss was off the ATB pace of a $4.2 million loss.

However, adjusted gross profit is where the company missed badly, reporting a loss of $4.7 million in stark contrast to the $200,000 positive projection ATB had going into the quarter.

After estimating a cash burn of $5.7 million in the quarter and accounting for proceeds from the sale of land and the partial repayment of debt, Gomes put Flowr’s pro forma cash balance at approximately $10 million, making the company’s capital position a concern and possibly necessitating a capital raise, with the analyst estimating Flowr would likely need to raise about $20 million by issuing approximately 250 million shares.

The company is in the process of an operational turnaround, with an emphasis on competing in the Canadian premium dried flower market more effectively by introducing new strains; Flowr already has three new strains approved for listing with an anticipated launch in the opening quarter of 2022, with the expectation of being able to develop more cultivars by leveraging the Kelowna Research Station (KRS), operated in partnership with The Hawthorne Gardening Company, a subsidiary of The Scotts Miracle-Gro Company.

“Flowr is developing more than 50 high-THC cannabis strains in KRS to add to its pipeline,” Gomes said. “We believe that periodically introducing new high-THC strains is crucial for Flowr to grow sales in Canada.”

Internationally, Flowr, through Holigen Holdings Limited, has completed a new facility in Sintra, Portugal, which is expected to be fully operational early in 2022. The Sintra facility is currently growing new genetics shipped from the K1 facility in Canada, with an expectation of receiving more genetics through its partnership with Cookies to cultivate and distribute products in Portugal.

“As we look ahead to the fourth quarter of 2021 and beyond, we are excited about the opportunities to continue growth in Canada and the E.U.,” said Darryl Brooker, Chief Executive Officer of Flowr in the company’s November 29 press release. “Our focus will remain on executing our strategy to increase sales through new genetics and innovative product offerings, improving operational efficiency to ensure a consistent supply of high-grade premium products and maximizing the potential of Holigen.”

On account of the softer third quarter, Gomes has revised a number of his financial projections with immediate effect, lowering his fourth quarter revenue projection to $3.5 million from $5.2 million, contributing to a lower overall 2021 projection of $12.1 million compared to the initial $14.2 million estimate.

He has also softened his projections for the next two fiscal years, now projecting 2022 revenue at $22.6 million (previously $28.7 million), while 2023 now projects at $36.8 million (previously $46.4 million).

Gomes actually improved his adjusted EBITDA projection to a $3.5 million loss in the fourth quarter (previously a $3.8 million loss projection), though the overall loss for 2021 is now projected at $18.4 million (previously $17.1 million). Gomes now projects a loss of $11.7 million in EBITDA in 2022 (previously a $5.7 million loss projection), while 2023 now forecasts at a $5 million loss compared to the initial estimate of $2.3 million in positive EBITDA; Gomes now has EBITDA turning positive in 2024.

Gross profit projections also took a hit, as Gomes forecasts $400,000 positive in the next quarter (previously $600,000), with a revised 2021 outlook of an $8.7 million loss (previously a $3.6 million loss). Gomes still expects gross profit to turn positive in 2022, albeit at a reduced rate ($3.9 million vs. $9.3 million), while 2023 projects at $10 million compared to the initial $17.3 million projection.

“We believe Flowr is still in an early phase as the Company ramps up its Canadian and international operations,” Gomes said. “As such, the company’s valuation is highly sensitive to revenue growth assumptions. We note that the international medical cannabis market is uncertain because it relies on regulatory developments in different countries.”

The Flowr Corporation’s stock price is down 80.9 per cent for the year to date, having hit a high point of $0.60/share on February 10; it had a brief jump to $0.32/share on June 1, but it has been declining ever since.