While we are not overly familiar with Westleaf
Given the tough times coming for many larger producers, if a company cannot produce a differentiated product (through the quality of some other means), investors should be wary.
BC Business Combination
While stereotypes are often overweighted in relevance, one that seems to be true in the cannabis industry is the quality of the bud coming from BC.
This is clearly something Westleaf appreciates based on their business combination with We Grow BC, the company behind Qwest brands.
With both companies focused on producing “ultra-premium” cannabis, this combination makes them one of the more significant players in the craft cannabis space. The company will be vertically-integrated, with a total production capacity of 9,100 kg.
Ultimately, the important factors with this combination are the ability of We Grow BC to increase the supply of its popular Qwest brand and the additional non-dilutive financing provided by ATB financial.
Westleaf Acquires Right-Sized Operations
Today, Westleaf released Q3 financial results from We Grow BC’s Q3 2019. Overall WL investors should be happy with the acquisition that was made.
We Grow BC’s operations appear to be in good order. They generated $3.4 million in revenues in Q3 of 2019, with gross margins of $0.99 million (30%). With cash operating expenses of $375,000, the company is well-positioned to generate positive cash flow.
Unfortunately, Westleaf is not in the same position.
In Q3 2019 they generated revenues of only $1.7 million, with a gross profit of $0.64 million (39%). In comparison, their cash operating expenses total $3.1 million, suggesting We Grow BC’s strong operations can provide them with a much-needed boost.
The bigger concerns rest with the overall financial position of Westleaf. The company has $6 million of cash on their balance sheet, with accounts payable and current debt liabilities of $17.4 million.
While they have been in a “building” period, which might justify the lower revenues, the company still has to dig themselves out of a deep hole. Even with the recent $8.9 million of financing from ATB Financial, they will need to secure additional capital from somewhere to cover their obligations.
Investors should steer clear until more clarity on the companies’ liquidity situation is provided. While the acquisition of We Grow BC may be immediately accretive, it doesn’t appear to be enough to overcome a struggling balance sheet.
Wildfire was a market awareness client of Capital 10X.
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