Flower One Holdings — Best Investment Out There - Jos Evans
Flower One Holdings — Best Investment Out There Jos Evans

Flower One Holdings — Best Investment Out There

Flower One Holdings is a hidden gem of a company. It easily has one of the best risk/reward profiles of any stock in the entire equity market. I realize that is a bold statement, but let me expound on all the reasons why it’s not an overstatement. It is a screaming “buy” and is likely going north of $200 (from $1.80 today) within 18 months. If that sounds crazy to you, just bear with me…

Below, I will set out to shed light on three major points:
1. Why haven’t you heard of Flower One yet?
2. Why is it the best in class cannabis company/stock?
3. Why is now a great time to get in (and why the opportunity won’t last long)?

The story of Flower One cannot be properly told without telling the story of Steve and John Newell, for ease let’s call them the Newell Brothers.

Flower One is majority (circa 50% of float) owned by The Newell Brothers, owners of Windset Farms. Windset Farms is a multi-award winning producer of food and has some of the highest margins in the business, operating over 11m square feet of greenhouse across California and Vancouver growing tomatoes, cucumbers, peppers etc. Now tomatoes may not be a sexy crop like cannabis, which is probably why you haven’t heard of the Newells, but actually growing tomatoes has a huge amount in common with growing cannabis. So it’s smart to keep an eye on the guys that have mastered the professional tomato farming game, especially in this market where a lot of inexperienced cowboys are out to make a quick buck off of cannabis when their farming experience usually boils down to a few potted plants in their backyard.

To give you an idea of how well these guys are doing with their traditional crops, Windset have about $450m revenue and $80m odd profit on that annually. It is an exceptional company in a tough business, and they stay ahead of the competition because of Steve’s relentless drive for innovation and quality; Steve spends a lot of his time on the road, visiting other state-of-the-art greenhouses around the world and importing and tweaking their practices to get the highest quality product in the most efficient manner. These people are serious operators with a proven track record and have been incredibly successful for decades.

How did Fower One Get Started?

In 2017, as it was becoming apparent the full legalization of Cannabis was only a matter of time in North America, the Windset Farms team decided to put their expertise to use in this new area and set out to become the highest margin operators in Cannabis. They set up CNX holdings to convert a greenhouse in Nevada owned by Windset Farms (sold at cost to CNX) and started their adventure. CNX was seeded with investment from the employees of Windset Farms and the personal networks of the team; they did no traditional VC/Investment bank etc. type financing. Over the course of 2018 they used the funds to begin conversion of the greenhouse, buy a dormant entity on the CSE called Theia Resources (a reverse takeover) and acquire NLVO organics in Las Vegas (an all share transaction), a small, high quality Cannabis producer and processing facility with a wide variety of strains. They bought NLVO for their expertise in the space, their retail connections, licenses and their unique strains. NLVO has become the breeding ground for the main company and testing ground for introducing new methods to the main greenhouse. They changed the name of the newly combined CNX-Theia-NLVO to Flower One Holdings and set the re-listing day for Oct 2018 under the ticker of FONE on the CSE (subsequently also added as FLOOF to the US OTC market)

What’s All the Secrecy About?

In the months before the re-listing, NAFTA was being renegotiated and, to put pressure on Canada the US got very tough on Canadians in the Cannabis business, asking them at the border if they were involved and banning them for life if they said yes (see https://www.latimes.com/world/la-fg-canada-marijuana-immigration-20181015-story.html for instance). This was a complete disaster for the Newell Brothers, who are Canadian by birth but who’s main businesses are US based. Getting banned from entry to the US would have been an existential threat to Windset and Flower One. In response to this threat, they shelved any PR plans for Flower One and reduced their official role in Flower One to that of simply ‘Advisors’ rather than the driving force that they really are. That’s how Flower One was forced to hide their most valuable asset.

This caused a major problem on the day of re-listing: due to the lack of PR, nobody knew about the company. In addition, anybody who happened to see the press wire about the listing and looked at the company documentation would have been presented with very limited information, which purposefully obscured the real story here: that the people behind Flower One are proven winners in the art of greenhouse cultivation and have the resources and scale to be hugely successful in this space.

So — on the day of re-listing there were no buyers because nobody knew about the company (no previous institutional exposure, no media interviews, no real STORY to go viral) and lots of sellers; the owners of Theia and NLVO wanted to cash out at least some, the original investors were all individuals who had put their life savings into the new venture, backing their employer/friend. This of course led to a share price that was down on the floor, around $1.30 (USD) and a market cap of around $200m.

Subsequent to NAFTA2 being agreed, the State Department officially reversed their stance on Canadians involved in Cannabis, but then also banned some from US entry (for life!) after that statement. Understandably, this did nothing to allay the fears of the Newells and they have as a result continued with their low-key official involvement (whilst 100% driving the company in the background).

In the meantime….magic has been happening.

The McDonald Brothers of the Cannabis Industry

Why did McDonald’s become McDonald’s as we know it and beat out every single other burger flipping establishment of its time to become the behemoth of the fast food industry it is today? Two visionary brothers, Richard James and Maurice James McDonald engineered an incredibly efficient system of cooking, and serving burgers that completely outdid every other company in the business, and left competitors behind in their dust.

The Newells have done exactly that in the greenhouse farming industry. As a result, Flower One has absolutely crushed every milestone they set themselves. They capped the greenhouse early in 2019 and started harvesting in Q2, weeks ahead of schedule. Their crop yield is running about 2.5x higher than expected and the quality of the product is extraordinary. The main 400,000 square foot greenhouse (which I have visited in person) is an exceptionally impressive facility, with state of the art lighting, drying and processing, where they do everything for their brand partners from seed to retail. To give you an example of the attention to detail; they irrigate the crops from the ground up rather than using sprinkler systems, so that the water does not damage the leaves of the plants. The greenhouse automatically detects a reduction of sunlight in any corner of the space and artificially increases light in those spots to make up for the difference. The greenhouse — and team running it — are exceptional.

The team in Nevada have demonstrated the lowest production cost for Cannabis in the whole of North America, at $0.45/g. This is a monumental accomplishment. It means they could sell below the cost of production of all competitors (roughly $1.80/g) and still make a huge profit. In Q2 2019 — despite the greenhouse only having been finished mid quarter — they increased the value of inventory and biological assets by $56m. Over a roughly 6 week period. Given the average sale price of Cannabis flower is $6/g and Flower One’s all-in production cost is $0.45/g, roughly 90% of that $56m will be translated into cash profit in the coming quarter. Fair value accounting allowed them to book the profit for Q2–2019 despite the inventory not yet being sold (Nevada legislation requires every 5th pound to be sent for testing before the product came be sold, hence the delay in sales); but there was no revenue associated with the profit, so anybody looking at it from a Bloomberg terminal would be highly suspicious.

Due to their size and quality, Flower One has managed to attract some of the biggest brands in the space to work with as partners, over which they have exclusivity. They will have no trouble converting the book profit into a cash profit in the coming quarter as they have the brands (for which they are doing all the processing and packaging also for additional profit) and they have the distribution network in the existing NLVO relationships, plus another few dozen they have cemented in the last six months.

Why Now Is the Best Time to Buy and Why You Shouldn’t Wait

Flower One has begun to sell their product as of early August 2019. That means they are now generating huge cash profits week in, week out, in perpetuity. They will be producing on average about 6,000lb of flower per week at a profit of $2,100 minimum per lb (assuming current pricing as of Aug-2019) i.e. roughly $650m (USD) profit annualised, versus their current market cap of $300m. But it doesn’t even stop there — this is simply the expected profit from flower. Distillates (gummies, vapes etc.), which they will be producing themselves are 60% of the market and are multiple times more profitable than the pure flower.

There is the potential for Flower One to make BILLIONS in profit annually from this one greenhouse, which they could then copy paste across the country, once it becomes federally legal. The legal market for Cannabis will grow hugely as the market shifts to federally legal and regulated, with customers over time preferring the consistency and abundance of choice they will get from the legal market over the black market. Hence, we are talking about a total addressable market nationwide for Flower One that will grow rapidly for decades, and being the most efficient and highest quality producer out there, they will be perfectly positioned to take advantage of this growth.

What are the risks? Oversupply in the short term is of course one. Nevada, however, is the ideal market to be entering into for Flower One, as they limit the number of cultivation licenses, meaning supply is capped and, of course, Las Vegas is a wonderful source of demand. Prices are high relative to the rest of the country and have been stable and slowly increasing over the last few years, despite the entrance of more producers. Even if we assume Nevada decides to massively increase the number of licenses, with their cost of production so low Flower One will be able to dominate the competition, but of course at the expense of profits in the short term. Given the current share price though of 0.5x forward P/E, there is really little risk here.

In fact, because you are buying a growth equity below book value at 0.5x 12m forward P/E, there is really very little risk at all that isn’t already factored into the price. The greenhouse itself is worth at least $150m, without factoring in NLVO (call that another $50m). Their Q2 assets are worth another $56m and they have been producing for another 6 weeks since then, meaning another $70m odd in assets have been produced since 1st July. So we are looking at a company with about $320m in assets trading at $300m market cap. They do have about $100m in debt, but of course they are now throwing off huge wads of cash to service that and pay it back.

So where should it be valued? I’m going to ignore the other pot stock valuations in the market because they are mostly insane (billions in market cap despite only double digit millions in revenue) and focus on the fundamentals.

Assuming a conservative figure of $500m annual profit for the flower only and giving it a growth P/E of 30 we are looking at $15bn in market cap we are looking at a price of $90 (USD). As I said, there is huge upside potential to this due to the much higher profitability of the products, and then of course there is the expansion to other States later, hence my stated possibility of it going to $240 at the top of the article.

This is one of the best opportunies in today’s markets bar none, and certainly THE best opportunity in the cannabis space and it will not be around long. Their Q3 earnings announced in November will show tens of millions in revenue and a huge profit on that revenue.

I bought into Flower One pre- reverse takeover, in the second round of financing they did as a private firm. I have been blown away by the team, their relentless focus on perfection and their execution. I have continued to buy more and will continue to do so, until it is reasonably valued.

Please feel free to contact me at londonjevans@gmail.com if you have any questions.

NB all opinions and forecasts expressed are are my own. Do your own due diligence before buying.

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