Westleaf Inc. Announces Third Quarter 2019 Results and Update on Operations

Press Release

CALGARY, Nov. 28, 2019  – Westleaf Inc. (the “Company” or “Westleaf”) (TSX-V:WL) (OTCQB:WSLFF), released today its third quarter financial results for the fiscal year 2019, for the three month interim period ending September 30, 2019 and provided an update on operations. Westleaf’s third quarter Financial Statements and related Management Discussion & Analysis for the reporting period are available under the Company’s profile at www.sedar.com

Q3 2019 Financial Highlights:

• Operating revenues of $1.7 million for the third quarter of 2019, up 82% from Q2 2019. Total revenue reflects operations from three cannabis retail stores in the Saskatoon region and one in Calgary, the latter which was only operational for the final two weeks of the interim period. In management’s view, the urban stores continue to perform well and are achieving blended gross margins of ~37%.
• Selling General & Administrative (SG&A) costs of $3.1 million for the quarter, down ~$0.7 million or 17% from Q2 2019. Westleaf continues to be focused on cost reductions and is implementing further overhead reduction initiatives.
• Westleaf’s cash reserves at the end of the reporting period were $10.0 million and the Company has access to low-cost, undrawn credit facilities with ATB Financial of ~$18.9 million which brings the total available borrowing room and cash reserves to ~$28.9 million;
• The Company opened a fourth Prairie Records retail location in Calgary, Alberta, on September 1, 2019, bringing the Company’s total cannabis retail profile to four stores operating, and the Company announced the anticipated development of three more proposed cannabis retail stores, one in downtown Calgary, one in the University District in Edmonton and one in Banff National Park, all of which are subject to applicable regulatory approvals, including approval from Albert Gaming Liquor and Cannabis.

Highlights Subsequent to Quarter End:

• On November 7, the Company announced the proposed merger of the Company with We Grow BC Ltd., the cultivator of premium cannabis brand Qwest, to create a combined vertically integrated company at the luxury end of the cannabis market. The proposed merger is expected to provide the combined entity with access to $8.9 million in additional non-dilutive capital through the issuance of a new term loan ($4.7 million) and removal of the restricted cash requirement (~$4.2 million) under the Company’s current subsidiary level credit facilities (which are expected to be consolidated at the Company level as part of the transaction). Following the close of the transaction, the combined company’s remaining infrastructure projects are anticipated to be fully funded.
• Westleaf’s Phase I of The Plant, the Company’s large-scale extraction, processing and manufacturing facility in Calgary, (built to EU GMP specifications) received approval from Health Canada for a standard processing licence on October 11, 2019.

“During the reporting period, we executed on our previously stated plans to build out a viable integrated premium cannabis company and prepare the Company for the coming of Cannabis 2.0, that is the legalization of a large variety of cannabis derivative products,” said Scott Hurd, President and CEO of Westleaf. “We successfully completed construction on The Plant, and we received a standard processing licence from Health Canada within the estimated time frame. Subsequent to the quarter end The Plant has been operationalized and we are now prepared to begin manufacturing a number of cannabis derivative products for sale by the Company and through white label contracts for third parties.”

“Most substantially, subsequent to quarter end, we announced that we intend to merge Westleaf with We Grow BC,” added Hurd. “The resulting combined company is expected to have the scale and the cannabis brands to be a significant player in the ultra-premium end of the legal recreational cannabis market in Canada. In our view, We Grow’s Qwest brand has established itself as a leading cannabis brand, recognized for its ultra-premium quality products and rare flower varieties, evidenced by its leading realized selling price in the Canadian recreational market.”

Operating Highlights

The Plant – Preparing for Cannabis 2.0:

• Phase I of The Plant, construction of the Company’s wholly owned large-scale cannabis extraction, processing and product formulation facility, was completed and it received approval from Health Canada for a standard cannabis processing licence which allows the Company to begin cannabis processing production;
• Phase I of the facility is designed to process approximately 65,000 kgs of dried cannabis per annum into high quality oils, concentrates, tinctures, vape products and gel caps, including a white label vape product for Winnipeg based Delta Nine Cannabis Inc., and Westleaf’s first in-house product, a line of vape pens under the brand General Admission¹;
• The Plant is a highly strategic asset for the Company. Westleaf anticipates strong industry wide demand for efficient extraction, processing and formulation capacity. In addition, the merger with We Grow BC is expected to enable the combined entity to begin processing and production of derivative products under the premium brand Qwest.

The Plant has an additional 45,000 square feet of scalable space with the potential to expand capacity as well as potentially add additional product lines based on consumer preferences now that additional products have been licensed.  The first products expected in Cannabis 2.0 legalization are a line of vape products the Company plans to roll-out in the early part of Q1 2020. The Plant is also anticipated to be a key component in the merged company, as some of the processing capacity will be used to create Qwest branded ultra-premium cannabis derivative products.

Prairie Records – A Unique Retail Experience:

Prairie Records the Company’s retail brand continues to grow through the quarter with the addition of a store in Calgary’s Forest Lawn district, which opened on September 1, 2019. The Prairie Records two urban stores in Saskatoon continue to return gross margins close to 37%.

In September 2019, Prairie Records was awarded the Canadian “Retailer of the Year” Award by the Cannabiz GrowUP Awards and Conference and in November 2019, Prairie Records was recognized by the Canadian Marketing Association as a Silver Medalist in the Cannabis Category, for its on-the-ground launch campaign around the Company’s Saskatoon retail cannabis stores.

The retail environment in Alberta and Saskatchewan, where the Company operates retail stores, continue to show positive month over month growth. Alberta remains among the highest sales per population in the country with a 3.16% increase in sales from August to September 2019. Saskatchewan also continues to grow by similar amounts. (Statistics Canada, Cannabis Retail Sales).

With its open retail market, Alberta has accounted for more sales than any other province in the country since legalization, edging out Ontario which has three and half times the population but only a fraction of the stores open. In the first 12 months of sales, there has been a total of $928.3 million sold in legal retail and online stores across Canada. (Statistics Canada, Cannabis Retail Sales).

Thunderchild Cultivation

Construction of Westleaf’s purpose-built, indoor cultivation facility near Battleford, Saskatchewan has progressed significantly in Q3 2019 and subsequent to the reporting period. Phase I of the indoor grow operation is expected to include a total of 80,000 square feet with 20 grow rooms and approximately 21,000 square feet of flower bench. Phase II is expected to add an additional 50,000 square feet and bring total production capacity up to approximately 14,600 kgs per annum, all subject to receipt of applicable regulatory approvals². Principle construction is expected to be primarily complete in December 2019.

The remainder of the facility construction is fully financed with low-cost, non-dilutive bank debt from ATB Financial and Westleaf believes it is uniquely positioned to provide the high demand ultra-premium indoor flower to the market once operational. Assuming the closing of the proposed merger, the Thunderchild facility is expected to be a key asset for the expansion of the Qwest brand, as We Grow BC will introduce its genetics and plants into the facility, which is amongst the most sought after premium cannabis on the market.

Outlook and Additional Information

With the announcement of the merger with We Grow BC, the combined Company is anticipated to be positively positioned as the market enters an important next phase of growth within Canada’s expanded legal recreational cannabis market. The combined entity will be focused on the ultra-premium end of the market both from a position of cultivation and product development of Qwest branded cannabis and cannabis derivatives as well as at its Prairie Records retail outlets. Based on data provided by the Alberta Gaming Liquor and Cannabis (AGLC) Commission, Qwest products held down the first and third highest average retail price amongst all available cannabis products in the province, averaging approximately $20 and $17 per gram for Qwest Reserve and Qwest respectively³. In management’s view, this support for these ultra-premium products bodes well for the development of additional derivative products under the Qwest brand.

Share Structure

As of September 30, 2019, the Company had 142.7 million common shares outstanding, 23.5 million warrants outstanding, 7.9 million RSUs outstanding, and 3.0 million stock options outstanding. All RSUs were granted in accordance with the Company’s compensation plan.

About Westleaf Inc.

Westleaf is a Canadian cannabis company focused on cannabis brands, extraction and production of derivatives, wholly owned retail, as well as cannabis cultivation. The Company’s Health Canada licensed extraction and processing facility, The Plant, is expected to produce high quality and consistent cannabis derivatives and consumables, both for Westleaf’s in-house brands as well as white label products. Westleaf’s retail concept, Prairie Records, leverages the instinctual tie between recreational cannabis and music with stores operating or in development across Western Canada. The Company’s Thunderchild cultivation facility is scheduled for completion at the end of this year.

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