Three weeks after we introduced The Plant by Westleaf (WL.V), the state-of-the-art production facility located in Calgary, the company secured its first major contract to supply cannabis derivatives products.
Under the contract, Westleafw will supply approximately CAD$4 million worth of the good stuff to Delta 9 (NINE.V), a vertically-integrated cannabis company located in Winnipeg, Manitoba. Delta 9 will have the opportunity to increase its purchase amount up to $16 million per year.
The amount may seem like chump change, but don’t forget it’s coming from one company. Also consider that Canadians as a whole spent $85.65 million on legal cannabis in May 2019 (we ain’t talking billions yet). All this, and Westleaf’s The Plant is still in ‘phase 1‘ development.
The deal is actually a white-label partnership that will allow Delta 9 to rebrand cannabis derivatives products it receives from The Plant. The supply runs will begin October 1, subject to final approvals from Health Canada.
Under the agreement, Delta 9’s branded products will be sold through Westleaf’s wholly-owned distribution channels, which include Prairie Records and the company’s chain of retail stores. The products will also be sold across Canada through various provincial cannabis regulatory bodies.
Westleaf’s delicious menu
The $4 million purchase amount includes a variety of cannabis derivatives products, such as vape pens, gel caps, tincture oil and edibles. John Arbuthnot, Delta 9’s CEO and president, said the decision to go with Westleaf was an easy one.
“When looking at our suite of options for white-labeled derivative cannabis products, Westleaf stood out as the clear choice,” Arbuthnot said in a press release. “Given Westleaf’s large menu of existing product formulations and distribution capabilities through their cannabis retail chain, Prairie Records, we view this agreement as positive step in expanding our Delta 9 branded product offerings and distribution footprint.”
The Delta 9 deal is Westleaf’s first committed revenue stream under The Plant. The production facility is 15,000 square feet and has 65,000 kilograms of dried cannabis flower throughput capacity. Westleaf says The Plant has an additional 45,000 square feet of space available. If utilized, the facility will have more than 1 million kilos of processing capacity.
Cannabis derivatives: A budding market
When it comes to earning potential, cannabis derivatives are expected to dominate the landscape in Canada. Already today we see a clear shift underway toward ‘noncombustible methods’ of cannabis consumption, according to auditing firm Ernst & Young. People would rather nibble and vape than light up a joint.
Dried flower currently makes up roughly 84% of legal and illicit cannabis sales. The figure will drop to 46% by 2025 as extracts, edibles and non-edible derivatives make big gains.
Ernst & Young says derivatives are “higher-margin” products that will help grow the legal cannabis market by over 50% in the next six years.
All said, the size of the direct cannabis market in Canada is expected to reach $11 billion by 2025, according to Ernst & Young. Illicit sales will decline relative to legal goods as the industry continues to mature.
Westleaf stock update
Westleaf’s stock opened higher Wednesday before completely reversing gains later in the morning. WL.V is currently valued at $0.47, having declined 3%. The stock is trading at a fraction of its 52-week high of $4.00, highlighting the extreme volatility of marijuana investments.
WL.V is down 70% for the year. The Canadian Marijuana Index is off by about 5% in 2019 but has plunged 50% since September. Good God, with declines like these, sometimes I forget I’m analyzing marijuana stocks and not altcoins.
At current values, Westleaf has a total market capitalization of $77.1 million. Whether this represents a discount or fair market value depends on how you view developments like the Delta 9 deal.
– Sam Bourgi
Full Disclosure: Westleaf is an equity.guru marketing client.