Already known for its cutting-edge genetic and cultivation expertise, Flowr Corp. (TSXV:FLWR) (OTC:FLWPF) recently announced plans to begin selling cultivars in seed and clone form in the 2nd quarter of this year. As Canadian cannabis producers race to expand production capacity, Flowr is making a move that will help it diversity its revenues and even benefit from other companies’ growth.
Under the leadership of Co-CEO Tom Flow, Flowr has set itself apart for its innovation in genetic materials and cultivation expertise. Now they are looking to expand their business model outside of normal production. They have identified their primary opportunities in Canadian Licensed producers, micro-cultivators, individuals growing for personal use, and exports to producers in international markets.
The market for selling cultivars is less developed than licensed cannabis production and Flowr is one of the first major producers to enter the space. As a company, they have put a major focus on innovation in cultivation techniques and genetic development. While they are also expanding total production capacity with the development of the Kelowna cultivation center, the site will also host a research and development facility devoted to improving cannabis production techniques and systems. This facility will be the only one of its kind in North America focused specifically on cannabis.
The research and development facility is part of the partnership between Flowr and Hawthorne Canada (a subsidiary of Scotts Miracle-Gro). This is the only partnership between a Canadian cannabis company and an American gardening and cultivation firm. Canopy Growth Corp. (NYSE:CGC) (TSX:WEED) and HEXO Corp. (TSX:HEXO) (NYSE:HEXO) also have partnerships with American firms, but they are focused on distribution and development of cannabis beverages.
Flowr’s focus on growth expertise has already attracted significant notice. The company acquired nearly 20% of Holigen in a deal for only C$6 million in cash and a license for use of Flowr cultivation IP. The almost 100,000 kg of projected Holigen capacity Flowr gained exposure to has an implicit valuation of almost C$2.6 billion compared to the cost of acquiring the same production exposure from Canopy.
As the Canadian cannabis market matures, having this diversification of revenues could become an even bigger advantage to Flowr. Industry experts are already expecting new capacity coming into the market to exceed demand by 2021. The largest producers have received billions in new capital infusions to expand their capacity at incredible rates. The growth for the industry since legalized sales began has been monumental, but so has the speed at which the industry capacity has been expanding to meet that need.
Flowr’s leveraging of its IP value to gain access to significant new capacity through Holigen sits in stark contrast to the billions other firms are spending to build new facilities and adding hundreds of thousands of new kgs of supply to the market over the next few years.
As new supply into the markets meets and exceeds projected supply, downward pricing pressures will start to become much more of a concern. Compressing margins just as new facilities are coming online will put a lot of pressure on firms whose primary strategy is growing to meet demand. By selling its high-quality cultivars as an additional source of revenue, Flowr can mitigate the impact of declining prices on its own bottom line.
There is also concern in the industry that Canadian producers won’t be able to take advantage of the US market as legalization efforts expand. As individual states have increased access to medical and full recreational use, the trend has been that local producers have been able to scale up rapidly to meet demand and the black market fills in the shortfalls throughout the process. Similar to the way that no Canadian producers were able to take advantage of even neighboring US states pushing legalization efforts, it is expected that even full legalization of the US market may not be a major benefit for Canadian firms.
An exception to that trend would be Flowr selling its seeds and clones to US manufacturers for production in those markets. With an expected annual capacity of 3.2 million clones, Flowr could be well positioned to benefit from producers in many markets looking to purchase their products rather than spend the time and money on developing their own genetic materials.
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