I’ve had several asks about The Flowr Corporation ($FLWR) recently, and in came another this morning. TheCannalysts had toured the outfit a little over a year ago, and I came away impressed. Their financials though begged questions about their ability to realize the vision of the business.

Our look at their last year end a year ago saw a slow start to sales incitation. Product planning looked to be the driver, $FLWR certainly weren’t alone during ‘early days’ in that regard. Their outdoor grow – what I thought would be complimentary – wasn’t much mentioned beyond harvest. Their European entry was planning to take off a crop, and a move into Australia had begun.

The quarter(s) that followed saw the outdoor harvest written off, insiders pick up large pieces of a couple of raises, and a restructuring began. Debt covenants were breached, a waiver granted, and….well…it’s hard to keep up.

They purchased Terrace Global, an outfit they’d had a joint venture with overlaying the Portuguese operations. They repriced some debentures, and accelerated conversion of them over the course of 5 weeks. They began paying folks in shares late in the year in conserving cash, and saw more change at the executive level.

They ended the year paying debenture interest in shares.

According to $FLWR, Hawthorne saw its’ completion announced in January, after having some additional funding come in after amending the initial deal with Scotts. It was only $1.3MM ($1.2MM of it was used to officially declare it ‘open’) which leads me to believe Scott’s is keeping this all on a tight leash. As it always has.

All along as well, $FLRW’s shown an ability to get additional capital infusions, primarily from insiders. I’d mentioned the high level of investment by management previously, this has apparently not abated. They’ve been able to keep cash coming in as its’ been needed.

2021 has seen much more change than 2020 already: additional executive departures and yet another restructure (this time announced as a ‘strategic review’). In it, $FLRW’s decided to sell the land they’d been using for outdoor cultivation in Kelowna, shutter their Toronto offices, sell extraction equipment (that was on the books at $2.6MM) for an estimated $1MM, selling Australia entirely, selling the outdoor grow space in Portugal, subletting 75% of the Hawthorne building, as well as selling production licenses in Spain and Uruguay.

I’m not surprised at any of this. Not in the slightest.

As expansive and ambitious as their moves were, at some point, they were always needed to be underpinned by cashflow. In the past few looks at them, I became a broken record about $FLWR needing to show sales increases, of which there’s been little material improvement of. Yep, they are trending upwards, and they’ve seem to have found a solid little niche in the premium segment. The operative word there is ‘little’, as in a $15MM/yr run rate.

With so much going on, this company is going to look much different in a short period of time, all of which was likely spurred on by their year end statements. Let’s see what they say.

To the financials!

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• $20MM in cash on the books, and that’s going to get increased by $16MM….coming in from a raise during calendar 2021.
• Their product has finally entered Quebec. Can’t hurt.
• A/P is at $9MM. Some $35MM in long term obligations, $6MM in short term.
• Revenue in the past quarter was $3.5MM, and total annual revenue: $7.5MM. Yikes. Negative gross margin of $7.4MM. Yikes. SG&A: $18MM. Yikes.
• A newly announced CEO had the decks cleared prior to his arrival. Interestingly, he’s a former GM of Mission Hill Winery.
• That new guy has inherited an absolute mutt of a business. This is one of the worst operating profiles I’ve come across. And that’s excluding $84MM of impairments over the year.
• They produced 4x what they sold in the latest quarter.
• Holigen – their European arm – sold $67k in flower during the quarter, of which it cost $1MM to produce.
• Great disclosure by the way. For a year end, they present a fulsome look at the quarter rather than burying it. I don’t recall ever having an issue with $FLRW’s disclosure, it’s excellent. What it’s disclosing is another thing.
• 132MM shares outstanding.

Ok. You get the idea.

I’ve met and stayed in touch with a couple of their people since our tour of the facility. Their capital markets person (who I was impressed with), is gone now, likely a result of the headcount rationalization.

I see $FLWR’s ‘strategic review’ as being one year overdue. There’s an irony there, in that they hadn’t quite finished what they’d already started though at that time, and whether or not ‘keeping up appearances’ kept them tracking on an increasingly unrealistic path….I can’t say. They definitely should have pulled the ripcord long before this.

The business itself had checked many boxes: a premium indoor facility buttressed with controlled outdoor for cultivation, verticality in extraction, international development and preparing for off-take, genetics potential and a research facility under a JV with an absolute giant in Scotts….it hit many of the notes that capital in the Canadian sector demanded to hear. Yet, all of the signs were there, often loud and clear, but most apparent around sales.

Like other mid-tiers, they’ve got a road at dusk in front of them with no headlights. Their share count is in a state of metastasis, $7MM in cash required this year for loan obligations, another $24MM sitting on the books. Yet, they’re doing less in annual sales than $GTEC.

Staying in form, they’ve been able to raise some $16MM in the first quarter of 2021, so, they’ve got some cash for now. As to whether there is even a chance of turning this thing around….well….I suppose the new guy thinks so.

From my perspective, $FLWR presents all of what went horribly wrong in Canada’s legalization. Building out hard, going international, building verticality….they tried to do it all without having made sure they could do at least one of it first. And they seem to be one of the last ones to be trying to clean it up.

It’s a tough story for me to tell, because as we’ve seen the zombies and under-performers wither (or get taken out), even the tightly held float by management here and repeated access to cash hasn’t been able to overcome a seriously broken core operating model.

They still need sales, but first they’ll need to be able to produce weed for less than they sell it for. So, instead of one critical/potentially terminal issue to address, they’ve now got two. Their share price – which had shown resilience due to it being so tightly held – is waning along with their hopes. With $97MM in PP&E, there’s an incredibly steep path in front of them. At this point, I can’t see this ending well for them at all.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $FLWR or $GTEC