Since the year began, no industry has outperformed marijuana stocks. Last month, 15 predominantly brand-name pot stocks galloped higher by at least 50%, with well-known names like Cronos Group more than doubling in less than two months' time.
The expectation of a rapid rise in legal cannabis sales, coupled with the upcoming release of marijuana stock earnings reports next week from a number of major players, clearly has Wall Street and investors pumped. If all goes as planned, global cannabis sales could skyrocket from an estimated $12.8 billion in 2018 to $31.3 billion by 2022, according to a co-authored report from Arcview Market Research and BDS Analytics.
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Marijuana stock uplistings are picking up steam
Investors are also rallying around the validity and increased visibility caused by uplisting from the over-the-counter (OTC) exchange to a more reputable U.S. exchange, such as the New York Stock Exchange or Nasdaq. Moving from the OTC exchange to either of the two major U.S. exchanges comes with a number of perks.
First, there's the added legitimacy of being listed side by side with hundreds of companies that have time-tested business models. It establishes cannabis as an industry that's liable to be around for a long time, and encourages skittish investors to consider giving pot stocks a closer look.
Second, it provides a nice bump-up in volume-based liquidity. Trading on the OTC exchange isn't managed the same way as it is with the Nasdaq or NYSE, which can lead to extra volatility, wide bid-ask spreads at times, and erratic-to-low daily average volume. That's unlikely to be the case when listing on the NYSE or Nasdaq.
Third, there's the better likelihood of NYSE- and Nasdaq-listed companies gaining access to nondilutive sources of financing than an OTC-listed company. There are a lot of boxes that need to be checked off in the application process to list on a major U.S. exchange. Companies that meet these requirements are usually seen in better light by financial lending institutions, and are therefore more likely to have access to traditional banking services.
And finally, listing on the NYSE or Nasdaq can lead to coverage or investment from Wall Street firms. Not all institutional investment firms are allowed to purchase stock in companies listed on the OTC exchange. Moving to a more reputable exchange makes this no longer an issue.
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Meet the cannabis no-name that just applied to list its shares on the Nasdaq
Since February of last year, when Cronos Group became the first pot stock to uplist, six total weed companies have made the move to the NYSE or Nasdaq. A number of others pot stocks, such as CannTrust Holdings and Village Farms International, have also started the process of uplisting to a more reputable U.S. exchange. This week, another marijuana stock threw its name in the hat by filing paperwork to list its shares on the Nasdaq, and you've probably never heard of it before: Flowr Corp. (FLWPF +0.00%).
Flowr is a British Columbia-based small-cap grower that debuted as a publicly traded company during the second week of October. In terms of aggregate production, there's not a whole lot to speak of, but that in no way makes Flowr forgettable. Rather than focusing on mass production, the company has instead chosen to focus on maximizing the quality of its growing process. In other words, Flowr is devoted to creating premium and ultra-premium crops of cannabis.
The company's Kelowna campus features an annual run-rate capacity of about 7,600 kilograms now, but that'll likely double to around 15,000 kilos once a 32,000-square-foot expansion is complete by midyear, with production beginning in the third quarter. Furthermore, Flowr is working on an indoor grow expansion to Kelowna spanning 140,000 square feet that'll commence operations in the first quarter of next year, adding 45,000 kilos in annual output. By the first quarter of 2021, Flowr expects to be producing 60,000 kilograms of premium and ultra-premium dried cannabis per year.
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Although this won't place the company anywhere near the top-10 growers in Canada, it has competitive advantages up its sleeve that could allow to outperform its larger peers. Namely, its projected yield of perhaps 300 to 450 grams per square foot would be up to three to four times the industry average. Considering that ultra-premium cannabis already commands a pricing premium since there really isn't much supply of higher-quality weed, this is the perfect recipe for superior operating margins.
Flowr has also forged a research and development partnership with Hawthorne Gardening, a subsidiary of lawn and garden care giant Scotts Miracle-Gro (SMG +0.89%). The duo will be operating a 50,000-square-foot facility on the Kelowna campus that includes laboratories, genetics breeding areas, and indoor and greenhouse grow sites. Flowr will bring its ultra-premium cannabis expertise and growing data analytics to the table, while Scotts Miracle-Gro's Hawthorne will provide its various cultivation, lighting, and irrigation systems. Construction, which will be paid by Scotts Miracle-Gro's subsidiary, is expected to be complete by this upcoming summer.
A word of caution
Although we're talking about a relative no-name in the cannabis space, Flowr arguably has an interesting niche that could translate into substantial profits, and hopefully improved visibility if it's listed on the Nasdaq.
However, it's also important to keep in mind that production expansion and research, especially into ultra-premium cannabis, won't come cheaply. That means losses are likely, at least in the interim.
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Back in late November, Flowr issued its first quarterly report as a publicly traded company. With no sales to speak of, and the added costs of a listing expense and share-based compensation, Flowr reported a loss of 5.6 million Canadian dollars, effectively doubling its year-to-date loss through nine months of 2018 to CA$11.8 million. Over the nine month period, it's used CA$6.1 million in cash for operating activities, and burned through another CA$11.1 million in cash for investing activities, most of which was devoted to construction at Kelowna. With projects ongoing through the early part of next year, these costs could be prohibitive to the company generating much, or any, profit.
The good news, of course, is that being able to go public and issue shares has given Flowr more than enough cash to meet its near-term financing needs. This doesn't mean it won't seek additional financing and/or dilute investors at some point in the future, but capital doesn't look to be an immediate concern. Nevertheless, as is the case with all marijuana stocks, there are still speed bumps to be wary of as Flowr attempts to make the move from the OTC exchange to the Nasdaq.
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