You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
A capital raise of $5 million didn’t qualify for publication this week due to its small size, but we think this was actually a big story that investors and operators should know about. Today, we are using this newsletter to remind our readers of something we have been discussing for a while. The outlook for the American cannabis industry has improved greatly over the past few months, but, as we have been saying, not all companies are positioned to capitalize. One of those is a company that we follow closely and actually think has a great strategy and has executed operationally, but we have been warning subscribers at 420 Investor consistently to be cautious on the name due to financial constraints.
Flower One operates a large-scale greenhouse as well as a processing facility and an additional indoor cultivation facility in North Las Vegas, offering turn-key production and distribution for many leading brands. The company reported a challenging Q2 on Wednesday morning, with revenue impacted by the store closures in Nevada, but it also guided for Q3 revenue that was higher than previous analyst consensus expectations. It closed the day at an all-time closing low, but not too far from the March lows. Thursday morning, it priced a C$5 million unit offering at a 24% discount to that close, and the stock ended up dropping below the offering price:
To put things in perspective, the one day decline following the C$5 million capital raise knocked almost C$27 million off the market cap of the company prior to the capital raise. We think many investors were caught off guard because they hadn’t paid attention to the balance sheet and cash flow, something we have been suggesting is of utmost importance in several newsletters over the past year, especially since the pandemic began.
We think highly of Flower One and hope that this capital raise serves as a bridge to a more secure financial position, whether that is through debt restructuring or additional capital on better terms, perhaps through a strategic investor. It’s worth remembering that Indus Holdings, which has a similar business model in California, found a strategic investor earlier this year. Since we detailed that transaction, the stock has improved substantially.
Sharing stories like this is important because it illustrates a clear and present risk that we think persists for several cannabis operators, and we urge our readers to pay close attention to the financial condition and ability to raise capital of companies in which they invest. Capital access is improving for many companies, but this is certainly not universal, even as the industry conditions improve.
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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
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Alan & Joel