Already one of Canada’s most innovative cultivation companies, The Flowr Corp (TSXV:FLWR) (OTC:FLWPF) is moving to compete with the biggest growers through a strategic partnership with Holigen. By acquiring nearly 20% of Holigen, Flowr has increased the cultivation capacity it’s shareholders have exposure to three times over.
Holigen is poised to quickly grow into one of the largest cannabis production companies in the world. They will soon be producing more than 600,000 kgs in Portugal and Australia with their cultivation facility in Portugal becoming the largest single facility in the developed world when fully operational by 2020. Creation of this facility has received special prioritization and access to low cost financing after being designated a Project of National Interest by the Portuguese government.
While Holigen is adding significant new capacity, this deal also underscores how valuable they consider Flowr’s cultivation IP to be. The deal to sell almost one-fifth their company to Flowr was in exchange for only C$6 million in cash and access to Flowr’s IP and cultivation experts. To illustrate the valuation this potentially puts on Flowr’s IP, it would cost a company C$2.6 billion to buy the same 100,000 kgs of capacity exposure through an investment in Canopy (TSX:WEED) (NYSE:CGC). An IP valuation potentially implied in the billions for a company with a market cap in the hundreds of millions in such a dynamic market should be raising eyebrows across the industry.
Holigen has shown how highly they value the cultivation expertise of Flowr and its co-CEO Tom Flow. Flow has a history of leading innovation in cannabis cultivation and his company is now poised to leverage this into significant growth at a fraction of normal acquisition costs. Flowr was projecting 11,000 kgs of annual production when their Kelowna 1 facility is fully operational in mid 2019 and an additional 45,000 kgs of annual production when their Kelowna 2 facility comes online in 2020, but will now benefit from exposure to over 160,000 kgs of total production as Holigen continues expansion of facilities in Portugal and Australia.
The Holigen exposure could become even more valuable than organic growth for Flowr, since total Canadian cannabis production is expected to surpass demand by 2021. Downward price pressure in the Canadian market is going to become a major issue for the biggest producers, so companies will be looking for innovative approaches to reduce yield costs. Holigen’s production in Europe and Australia provide exposure to markets where demand growth is slower but price pressures are significantly less. As legalization efforts continue, the estimated cannabis market in the EU and Australia is projected to be a combined C$95 billion by 2028.
Holigen already had ties to the largest medical cannabis distributor in Australia and is forming partnerships with distributors in Poland, German, Ireland, and the UK. Their production capacity in Portugal takes advantage of some of the lowest cultivation costs in the world and unfettered access to medical cannabis markets throughout the European Union.
Flowr is setting itself apart as one of the best growth values in the crowded Canadian cannabis through focus on innovation rather than simply capacity expansion. They are still working on their unique research facility in partnership with Scotts Miracle Gro (NYSE:SMG) and have now gained exposure to multiple new markets outside of Canada through this partnership with Holigen.
This newest partnership for Flowr is a creative approach to competing with much higher volume producers with significantly less capital than the competition is spending. They are proving it’s possible to punch above their weight class without the infusion of billions in funding that the biggest producers have needed.
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