Call it The Great Race. A new industry has materialized – the cannabis industry – which is finally moving past obstructionist laws and antiquated propaganda. Unlike alcohol and tobacco, cannabis is actually good for us.
The human body produces its own cannabinoids (known as endocannabinoids). These are used to promote regular bodily functions in numerous areas, and are processed through cannabinoid “receptors” found throughout our bodies. For this reason, cannabis is emerging as a benign but potent medicinal therapy, to help treat an increasing number of medical disorders.
Equally, as a natural, healthy substance, cannabis provides few of the health hazards associated with alcohol or tobacco when used recreationally. Beyond this, the hemp strain of cannabis boasts enormous quantities of nutrients in addition to its high cannabinoid content.
Combined, the alcohol and tobacco industries produce roughly $2 trillion per year in revenues. The global pharmaceuticals market is a $1 trillion per year industry. The global dietary supplements market is estimated to reach $220 billion in size by 2022. There are a lot of dollars up for grabs in these markets, with an increasing number of up-and-coming cannabis companies duelling for market share.
One of the Companies competing in this race is Harvest One Cannabis Inc (TSX: V.HVST, Forum). While H1 is a new corporate entity in the Canadian cannabis space, the Company’s cannabis operations are well-established, with an experienced management and grow-ops team.
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This management team surveyed the market and devised an overall strategy which was global in scope yet still prudent in terms of deploying shareholder capital. The Company is looking to penetrate markets in North America, Europe, and elsewhere – and not get left behind in this Great Race.
At the same time, H1’s cannabis expansion plan will be a phased growth strategy. This takes into account the uncertainty which exists with respect to precisely when Canada’s recreational cannabis market will obtain final legislative approval.
Harvest One’s principal assets were acquired from MMJ Phytotech Inc. (ASX: MMJ). MMJ was the 100% owner of two subsidiaries: United Greeneries Holdings Ltd and Satipharm AG.
UG is the cannabis cultivation division, with United Greeneries being the holder of an ACMPR cannabis cultivation license from Health Canada. This made MMJ, indirectly, the only foreign-based company to hold such a license in its operations.
Based in Australia, however, MMJ did not have the same access to capital markets versus a Canadian-based company. Equally, the retail investor market for cannabis companies is more developed in Canada.
The decision was made to migrate to a Canadian primary listing in order to be better positioned in the cannabis market. The vehicle for that transformation was an RTO with (then) Harvest One Capital. H1 acquired 100% of United Greeneries and Satipharm AG.
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This immediately provides V.HVST with a dual focus in its operations. Through its cultivation division, United Greeneries, the Company is pursuing a rapid-growth strategy to maximize cannabis revenues from both the recreational and medicinal-use markets. Through its bio-pharma division, Satipharm AG, Harvest One is positioned to capitalize on the specific, robust growth opportunities in the pharmaceuticals and nutraceuticals markets for cannabinoid products.
With United Greeneries now folded into Harvest One’s operations, UG’s cultivation license permits the Company to cultivate and produce cannabis products. This license pertains to V.HVST’s facility in Duncan, B.C.
The Duncan Facility is a state-of-the-art cannabis cultivation facility with its operations currently encompassing approximately 16,000 square feet. Close to 10,000 square feet is devoted exclusively to cultivation. Along with the Level 8 security vault required by Health Canada regulations, the facility also boasts its own in-house biochemical and analytical laboratory.
This leads to the Company’s cannabis expansion plans. At its current size, management estimates the facility has a cultivation capacity of roughly 1,000 kg’s per year of dried cannabis. Adding further value to Harvest One’s cultivation operations will be Health Canada approval for V.HVST’s sales license – anticipated in the near future.
The first two harvests from Duncan have just been completed. However, with medicinal markets in Canada and abroad growing rapidly and with the legalization of recreational use moving forward in Canada, the Company wanted to ramp up production to help meet the projected supply gap in this market.
Expansion of the Duncan Facility will take place in three phases. The Phase I expansion is expected to be completed within the next 12 months and will occupy roughly three acres. This is anticipated to increase cultivation operations to a maximum capacity of 8,500 kg’s. With H1 holding $15 million in cash, the Phase I expansion is already fully funded.
The Phase II and Phase III expansions will be progressively larger. Phase II will be comprised of seven acres of additional development and is projected to add an additional 17,500 kg’s per year of cultivation capacity.
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Phase III will be an even larger expansion. Occupying an additional 10 acres, Phase III will add an additional 25,000 kg’s per year of cultivation capacity .The projected completion date for the Phase III expansion is 2020.
That’s the current cultivation side of the Harvest One business model. The Company is equally committed to its bio-pharma division, run out of its Satipharm AG unit.
Satipharm is based in Switzerland. This may strike many informed cannabis investors as odd. Switzerland is a European jurisdiction where the use of cannabis is still strictly prohibited. However, research into cannabinoid medications is permitted, with one important caveat.
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This is where the convoluted regulatory landscape in Europe gets interesting. Cannabinoid research is authorized in several European jurisdictions. However, there is a variance in the (THC) potency-level of cannabinoids which is permitted in such research.
Tetrahydrocannabinol (THC) is the primary psychoactive compound in the cannabis plant. Most EU jurisdictions only allow research on what is legally defined as “industrial hemp”: cannabis with a THC content of 0.3% or less. Switzerland is somewhat different.
Specifically, companies in Switzerland are permitted to test potential medications with THC content of up to 1%. Ironically, some of the EU jurisdictions with less-stringent laws on cannabis consumption actually have tighter regulations on potency levels in research. This makes Switzerland one of the best EU jurisdictions in which to conduct this bio-pharma research.
Management is committed to developing nutraceutical and pharmaceutical products with potency levels which fall beneath this regulatory cap. Harvest One calculates that such products will face a much smoother regulatory path to reach the marketplace – especially in the EU.
The important point for investors is that THC is only one of nearly 100 cannabinoids present in the cannabis plant. Other cannabinoids which do not have psychoactive properties also have superb medicinal properties. Most notable among these cannabinoids is CBD (cannabidiol).
The Company is able to source (in legal terms) a “hemp” strain from a Scandinavian nation in the EU, at a very low cost, and which contains very high CBD levels (approximately 20%). This provides Harvest One’s Satipharm operations with extremely high margins on these CBD nutraceutical/pharmaceutical products. This is a pure CBD formulation, with the final product containing zero THC.
What is the difference between a “nutraceutical” and “pharmaceutical” CBD product? To a large extent, it is simply a matter of what the Company is legally allowed to state on its package labeling.
Currently, V.HVST is already marketing its products in Europe. Harvest One has rolled out 10 mg and 50 mg CBD capsules for distribution in Germany. In Germany, the Company’s capsules are sold in pharmacies, but as a “nutraceutical” product. The exact, same product is now also being retailed in Australian pharmacies – as a pharmaceutical product.
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These capsules use the Company’s proprietary Gelpell® delivery system. H1 has acquired the exclusive distribution rights for this Gelpell® Microgel technology for all cannabis-based applications.
Gelpell® is presently the only delivery system available on the market produced via pharmaceutical grade GMP (good manufacturing practices) to deliver CBD-based health products. The advantage is an even, metered delivery of the CBD contained in these capsules.
Research into the medicinal benefits of CBD indicates a long list of potential therapeutic benefits. With potent anti-inflammatory properties, CBD is thought to provide relief from diverse conditions ranging from multiple sclerosis, rheumatoid arthritis, and other chronic pain conditions. Among other potential applications include the treatment of sleep disorders, nicotine addiction, and epilepsy.
Clearly the users of these CBD capsules receive the same therapeutic benefits irrespective of whether they are labeled as “pharmaceuticals” or “nutraceuticals”. However V.HVST is determined to develop these cannabinoid products as true, licensed pharmaceutical drugs.
Via PhytoTech Therapeutics, Harvest One has established a relationship with Yissum Research Development Company, a bio-pharma research institution based in Israel. The Company is about to begin Phase II clinical trials for the use of CBD in the treatment of multiple sclerosis as well as pain management.
Even though H1 can retail its CBD capsules as nutraceuticals, and at high margins, there are several reasons for pushing forward with true CBD pharmaceutical products. At the top of the list is IP. Developing intellectual property in the form of drug patents is perhaps the most-lucrative business opportunity for any bio-pharma company.
Johnson & Johnson recently closed on a $30 billion acquisition of Actelion Ltd, one of the largest takeovers ever in the bio-pharma space. And Actelion retains a significant portfolio of its assets even with the $30 billion purchase price. With potential rewards like that, Harvest One is fully committed to its own cannabinoid pharmaceutical pipeline.
Over the near term, however, management sees the primary driver for share price appreciation being the cultivation operations of United Greeneries. As Canada moves toward legalization of recreational cannabis (currently slated for 2018), this isn’t H1’s only cultivation asset.
Harvest One has a second cultivation facility: Lucky Lake. The Lucky Lake facility is currently moving through Health Canada’s ACMPR licensing process, in stage three of the five stage assessment/licensing regimen.
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To expedite development of Lucky Lake, the Company announced a financing deal with Cannabis Wheaton Income Corp. (TSX: V.CBW) on May 1, 2017. Under the terms of the deal, CBW commits to a minimum of $20 million in funding to build out a minimum of 60,000 square feet of cultivation space, with the capacity to add (at least) another 60,000 square feet of cultivation capacity in the future.
In return, Cannabis Wheaton will acquire a 49% interest in a new company which will be spun out for the specific purpose of this joint venture. CBW will also be entitled to a 40% production stream from the Lucky Lake facility once the facility acquires its ACMPR cultivation license.
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The Great Race continues. With its global approach and multi-pronged strategy, management is confident that V.HVST will be one of the first cannabis companies to reach the finish line.
FULL DISCLOSURE: Harvest One Cannabis Inc is a paid client of Stockhouse Publishing.