Description

Flora Growth Corp. (“FLGC” or the “Company”) is a recent IPO that trades at 1600x revenue and 5.5x book (mostly cash).  This very early stage company plans to cultivate and process natural, medicinal-grade cannabis oil and high quality cannabis derived medical and wellbeing products in Columbia and sell it in the USA and Columbia.  The company believes that growing in Columbia is advantageous because of the better weather and cheaper costs. FLGC will use recently raised proceeds to build out its operations which may take 24 months to complete (I’ll take the over).   

The company states “We do not expect to generate any internal cash flows to finance the development costs in the foreseeable future.” So, if you are trying to justify this stock price using a dcf, you may need to have another gummie and add even more years to your model.

The company positions itself as a cannabis company but the paltry revenue it currently generates comes from non cannabis products (skincare, cosmetics, food).   The IPO risk factors state the company “has not yet grown nor harvested a commercial cannabis crop nor produced oil extracts.”

(Including warrants and options) the company has a market cap of $220 million, cash of $55 million, last year generated revenue of $100k and lost $14 million.  At the end of 2020, the company had $540k of inventory so I’m not sure they are expecting big revenue this year.  Cash represents 86% of assets, even more if you exclude goodwill, etc. 

The company had a $17 million IPO that was lead by the venerable firm of Boustead Securities at $5 per share.  The stock is already down 20%, but at $4 is still trading at a 50% premium to where the company privately raised capital (mostly via retail investors) last December even though not much has changed at the company to justify a higher valuation.  (Last December the company raised $30 million in a unit offering priced at $2.25 which included 1 share of common and 0.5 warrant struck at $3.00 per share).  Also, the current stock price is 2x the company’s own estimated stock price on Dec 22, 2020 which is the date the company gave the ceo 1.3 mm shares valued at $1.92 per share for a value of $2.6 mm.

The unit raise involved Dalmore Group which has had its only legal issues including a recent Finra censure and fine.  Boustead Securities has also had some issues and the following article (which is a few years old) claims that at the time, “Boustead Securities was identified as having thirty seven brokers working for the firm, with forty three percent having publicly disclosable information.”  https://www.securitiesfraudlawyerblog.net/boustead-securities-named-bad-broker-study/

As noted above, it is unclear when the company expects to generate meaningful revenue but based on the following disclosure it appears it may take 24 months before the company completes the first stage of its buildout.  The company states” Our management believes our current capital resources coupled with the net proceeds from the offering will be adequate to purchase and construct the modules of the Research Technology and Processing Center required to operate our business over the next twenty-four months and to complete the Quipropharma laboratory customization for our short term needs over the next twenty-four months.”

If we assume the stock is overvalued, the big issue is will there be a squeeze.  The company has 42 million shares outstanding (not including 9.3 million warrants at $2.47 and 3.8 million options at $1.08).  25 million shares are subject to a lock up, so conservatively we can assume that 17 million shares are in the float and freely tradeable.  Boustead does not appear to have a research arm so we do not expect a research pop in the stock price.

The cost to borrow is currently high at 40% but we expect that to drop as more shares settle into accounts as the company only went public on may 11.

Insiders have been granted huge slugs of stock/options and I have not found any records of them buying stock. 

The CEO, Luis Merchan, joined the company last year.  I’m not sure his experience at Macy’s qualifies him for this job, but you can decide for yourself.  Perhaps his Graduate Certificate in Marketing Management from Harvard University helped, but upon closer inspection this appears to be an online class that requires no application, costs $12k, requires you to  complete four courses and earn at least a B grade in each class (anyone know how many people actually fail this program).  Merchan does have an MBA from McNeese State University. 

Not surprisingly, there are some questionable related party transactions.

The company’s auditor is Davidson & co which has one office (in Vancouver).  Who knows if they have ever been to Columbia.

So we ask ourselves: How much of a roi on existing cash must management get to justify the current stock price? How long will it really take to build out operations?  How much will it really cost? Once the build out is complete, will it really be economical (or even legal) to export it to the USA?  How much risk it there doing business in Colombia? Do we have confidence in this management team?

Catalyst

reality setting in and more selling pressure