You’ve got to hand it to Wildflower Brands (SUN.C) boss William Maclean, he’s a sucker for an opportunity.
Back in the day, Wildflower’s origin story was they were going to grow weed on Vancouver Island. But the residents went all NIMBY, so he looked to Washington State. Then he locked in on vapes, then CBDs, then California.
The problem for them has always been, however, that they’re prone to believing their own hype.
Today, Wildflower made it’s first move that may have real staying power, when it announced it has signed a non-binding letter of intent to acquire Vancouver dispensary outfit City Cannabis, which has two licensed, permitted stores on the west coast.
This is big news for two reasons – first, those licenses and permits aren’t easy to get. Second, City Cannabis has two of the three out there.
Now for the downside: Wildflower overpaid like a Chinese real estate buyer.
Pursuant to the terms of the LOI, the company will acquire 100 per cent of the issued and outstanding common shares in the capital of City Cannabis in exchange for the issuance of 60 million common shares of the company at a deemed price per consideration share of 75 cents for aggregate consideration of $45-million.
The LOI also contemplates that, upon the closing of the acquisition, Krystian Wetulani, City Cannabis’s founder and chief executive officer, will join Wildflower as a director and as the chief development officer.
What sort of revenue does that buy a guy?
Well, turns out not that much.
During the year ended Dec. 31, 2018, City Cannabis had revenues of $7.7-million, cost of goods of $4.3-million for a gross profit of $3.4-million.
Administrative expenses were $2.4-million with additional losses for a share repurchase and lease buyout for income before taxes of $700,000 for the year ending Dec. 31, 2018. These financial results are management prepared. An audit is being performed now.
After the admin expenses and one-off costs, that $3.4m gross profit turns into $300k take home.
The company boasts “its Robson and Granville location is the premier location in Western Canada, located at the junction of the entertainment district and shopping district of downtown Vancouver,” and that’s not hype. There’s no better location for that business than there. A second licence is located at Fraser Street and East 57th Ave, which is the last non-gentrified hold-out in south Vancouver and not really a shiny target.
But Granville and Robson? That’s prime. So why isn’t City Cannabis rolling around in the sort of doughbucks that non-licensed dispensaries are bathed in?
The answer is less to do with the competence of the CC team and more to do with the insanity of how retail cannabis is dealt with in BC, and Canada at large.
Having set foot in the legal dispensaries recently, the experience was beyond disappointing. Terrible looking LP weed from five majors and a couple of stragglers, barely any product available, a lack of ancillary products that you’d prefer to use, such as edibles and beverages.
Realistically, while you want dispensaries to be licensed, trustworthy players doing all the right things, it’s tough to do business when you are. It’s much more profitable to be a d-bag with a card table and some jars you got fresh from Maple Ridge’s finest grey marketeers, along with brownies acquired from Craigslist that’ll just as likely melt your face as get you moderately buzzed.
Wildflower has clearly won the auction for these properties by blowing out the price on the deal to something nuts, effectively doubling their share count in the process and making it harder for shareholders to realize gains, but they’ve managed to be a first mover in the sector by going all-in.
If those dispensaries turn a hard profit soon and scale up quickly, and the government adds elements to the legal list to help retailers better serve the public, then the purchase price may have been worth it. If they don’t, and future licenses go to competitors, thus making things more competitive going forward, it might be tough to justify the big jump in the float.
Adding to the drama, GMP Securities has been tasked with providing a fairness opinion on the deal. Usually this is a simple sign-off, as these deals are rarely problematic by the time they get to this point, but I wouldn’t be at all surprised if the price tag on this deal causes GMP to take a stutter step.
Until that happens, this disclosure, at the bottom of the news release, is worth considering:
Investors are cautioned, except as disclosed in the management information circular of the company, to be prepared in connection with the acquisition, any information released or received with respect to the acquisition may not be accurate or complete and should not be relied upon. Trading in the securities of Wildflower should be considered highly speculative.
— Chris Parry
FULL DISCLOSURE: No commercial relationship with Wildflower and I do not own stock in the company.