Take a pass on The Flowr Corp, says ATB

ATB Capital Markets analyst Frederico Gomes’s view of The Flowr Corporation (The Flowr Corporation Stock Quote, Chart, News TSXV:FLWR) keeps wilting, as the analyst has downgraded his rating in a Monday report from “Sector Perform” to “Underperform.”

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

Gomes provided his latest analysis after the company released its fourth quarter financial results for the 2021 fiscal year along with its year-end figures.

“We believe management is executing well in cleaning up the balance sheet and downsizing the business to focus on Canada. However, material liquidity and going concern risks remain,” Gomes said. “While the cash burn may decline over the coming quarters due to downsizing, we view pronounced risks given the flat market share trend in Canada, the headwinds impacting LPs and the challenging macro environment.”

A primary positive to the company’s financial quarter was $3.8 million in revenue to beat the ATB estimate of $3 million and produce a 52 per cent year-over-year increase, which Gomes noted to be driven by increased sales in Canada due to the introduction of new strains and a new format of pre-rolls, increased retail store penetration and a $0.8 million medical cannabis shipment to Israel.

However, after ATB expected a $0.4 million positive adjusted gross profit, the company reported a $3 million loss, paired with an adjusted EBITDA loss of $5.2 million compared to the $3.5 million loss projection from ATB. Gomes said the added losses stemmed from a $1.5 million impairment on inventory. The company also reported $3.9 million in selling, general and administrative expenses which was above the company’s net sales.

“Although we did not reach our full objectives for 2021, we are encouraged by the positive steps we have taken to position Flowr in 2022,” said Tom Flow, Interim Chief Executive Officer of Flowr in the company’s May 20 press release. “Through the various changes that have been implemented, we believe Flowr is in a better position to realize its full potential and deliver results. The next few quarters will be an exciting time for Flowr as the Company takes the last steps towards profitability.”

The company has had an eventful month of May, starting with the sales of its indirect wholly-owned subsidiary, Holigen Limited, for $3.75 million in cash, 1.9 million common shares, the indirect assumption by Akanda of RPK’s indebtedness of approximately $5.1 million, and at least $834,000 of interim funding.

Following the sale, Gomes estimates that Flowr has proforma fully diluted cash of $11.8 million ($0.03 per share) including marketable securities and pro-forma debt of $6.8 million for a diluted net cash position of $5 million.

The company’s financial results came after the Ontario Securities Commission issued a cease trade order for not filing by the initial May 2 deadline.

With fourth quarter results now confirmed, Flowr Corporation wrapped up its 2021 fiscal year with $12.3 million in revenue, though Gomes has lowered his 2022 projection from $17.1 million to $14 million for a potential year-over-year increase of 13.8 per cent. Looking ahead to 2023, Gomes has lowered his projection from $22 million to $18.9 million to project a year-over-year increase of 11.2 per cent.

In terms of valuation, Gomes forecasts the company’s EV/Sales multiple to drop from the reported 5.5x in the 2021 fiscal year to a projected 4.8x in 2022, which represents a near doubling of the peer group average of 2.6x.

Meanwhile, the company’s adjusted EBITDA came in at a $20.1 million loss in 2021, and Gomes forecasts the losses to continue into 2022, setting a loss projection of $10.2 million (previously a $9 million loss) before forecasting a $6.6 million loss (previously a $5.4 million loss) for 2023.

Gomes also slashed his adjusted gross profit target for 2022 from $3.7 million to $1.6 million for a margin of 11.1 per cent, then cutting his 2023 projection from $6.8 million to $4.6 million for a revised margin of 24.1 per cent.

Going forward, Gomes forecasts the company will reach positive adjusted EBITDA in 2025, though he expects the company to remain a niche player in the Canadian market for the foreseeable future.

“We have reduced our estimates to factor in a weaker sales growth and margin outlook given the challenging conditions in the Canadian cannabis market and the Company’s liquidity position, which might impair further investments to grow the business more rapidly,” Gomes said.

The Flowr Corporation’s stock price has fallen by 2.4 per cent since the start of 2022, most recently peaking at $0.06/share on April 21 before dipping to a 2022 low of $0.03/share on May 16. With the update and lowered rating, Gomes has reduced his target price on FLWR from $0.08/share to $0.04/share, respresenting at press time a 12-month return of negative 20 per cent.