The quick ratio is a good metric to apply to developing small-cap companies like Biome Grow. It measures a company’s short-term liquidity and gauges their ability to meet its obligations (like debts).
Biome’s quick ratio is just under 2. There’s an argument to be made that inventory (part of my asset calculations) isn’t all that liquid–after all, how much faster can you move inventory than you already are without slashing prices?
Without accounting for inventory, Biome’s ratio would be 1.86. Generally, under two isn’t good. But not all liabilities are made equal.
There are fixed-term loans which have a set payment to be made every month or every quarter. And then there are debentures and the dreaded ‘death spiral’ which we covered in our piece about Wayland Group (WAYL.C).
Biome’s debt is the former, and that’s cause for cautious optimism; the company isn’t overextending itself to hoover up smaller companies like it’s competitors, instead opting for steady growth and avoiding onerous debt.
The company has established itself as a community-integrated craft grower and job-creator in Atlantic Canada with assets in Nova Scotia, Newfoundland and Labrador, Prince Edward Island and Ontario.
Biome’s revenue for the quarter totaled $340,574, while gross profit was $204,423. The company’s net loss before operating expenses was just over $1M.
With losses to be expected for fledgling companies, this loss tells me Biome is interested in playing it safe with its investors’ money.
During the same quarter, for example, Aurora Cannabis (ACB.T) had gross revenue in excess of $75M but a net loss of $169M.
In terms of liabilities, Aurora also had $286M in convertible debentures and $133M in loans for quarter. Remember the types of debt mentioned earlier? Debentures are the less-attractive kind.
Investor Place summarized the reasons why in a recent article:
The convertible notes issuance and mixed shelf offering will no doubt give Aurora plenty of cash to grow the business. But the cost to existing shareholders is more debt and share dilution. Now, this could still pay off for Aurora and its shareholders if the company puts the cash to good use.
Also, its competitors either raised cash on the stock market or sold part of the company in return for a cash infusion. For example, Tilray (NASDAQ:TLRY) raised $435 million in October, while Canopy Growth (NYSE:CGC) got an investment from Constellation Brands (NYSE:STZ).
Avoiding share dilution is key when it comes to keeping shareholders happy and Biome knows it.
Totaled up, Aurora’s quick ratio is 1.56, and even that has a caveat:
As at December 31, 2018, the Company has also obtained a waiver of the obligation to make an initial principal payment on Facility B in connection with an amendment to the payment clause of Facility B, which was completed on December 31, 2018. Furthermore, as of December 31, 2018, the Company has not satisfied certain additional financial tests required to enable it to access Facility A until June 30, 2019, assuming that the Company is able to satisfy such tests at that time.
In plain English, Aurora couldn’t pay its loan to the Bank of Montreal which one could argue is a result of overextending themselves with acquisitions and expenses.
But far from trying to rag on Aurora, it’s still the second biggest Canadian cannabis player, this comparison serves to demonstrate two distinct management styles: slow and steady vs 100 miles an hour.
If you have the capital, gobbling up IP and small companies with potential is a viable strategy. Even if the technology or product is never brought to market, a company can ensure its competitors never get the chance to use it against them.
But for small companies like Biome, playing that game is incredibly risky. The measured approach is far better suited to a company of its size. After all, Biome was never meant to compete against Aurora. It’s a small, craft player and there’s a market for that.
We think responsible growth in an attempt to minimize debt is a good call by management.
Biome Grow shares fell 1.8% to $0.55 today. The company has a market cap of $60.8M.
Full disclosure: Biome Grow is an Equity.Guru marketing client.