As the evolution of the cannabis industry continues to unfold, trends are emerging. A large percentage of cannabis companies remain focused on full vertical integration models, typically dubbed “seed to sale”.
Meanwhile, as higher margin cannabis-derived products have been developed (and markets for such products materialize), a number of cannabis companies have positioned themselves as specialty producers of these more advanced products. For the management team of North Bud Farms Inc. (CSE: NBUD, Forum), a significant niche remained untapped.
In a conference call with Stockhouse Editorial, the Company referred to this niche as “Cannabis 2.0”. It’s a mission to supply the highest quality cannabis as an input for premium producers of these advanced products, including cannabinoid-based pharmaceutical products. GMP standards for food-and-beverage raw cannabis; GMP standards for its pharmaceutical-grade cannabis.
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NORTHBUD is a new cannabis company. NBUD began trading on the CSE on September 20, 2018.
With the sector continuing to mature, investors have had the opportunity to observe the early entrants to this industry. Some have had spectacular success; others not so much. Cannabis industry executives have also had the chance to observe this development. For the management teams of newer cannabis companies, this means modeling strategies that have proven to be successful while shunning or refining those that have not.
In the case of the NBUD team, management already boasts an abundance of cultivation expertise. It was here that NORTHBUD was confident that it could introduce its own innovations and refinements as part of the second wave of cannabis companies entering this sector.
In many respects, the timing has been perfect. The introduction of “the Cannabis Act” (improving upon the previous ACMPR regulatory framework), provides a smoother, more transparent path for this next generation of entrants to the sector.
For the Co-Founder and CEO of North Bud Farms, Ryan Brown, the opportunity to aquire GrowPros MMP from Tetra Bio Pharma represented an ideal foundation upon which NBUD can build. This is a near-term cultivation opportunity, poised at the very last stage of the Health Canada licensing process, the Confirmation of Readiness stage. Indeed, “readiness” is essentially all that stands between the Company and the commencement of cultivation operations.
The GrowPros purpose-built cultivation facility, located in the municipality of Low, Quebec is under construction, expected to be completed for Q1 2019. Once finished, NBUD’s cultivation license will be imminent, Of even greater importance, the facility is situated on 95 acres of land, providing the Company with abundant space to scale up operations to much greater levels.
It wasn’t just the near-term status of this facility that drew NORTHBUD to the GrowPros operation. As many cannabis investors already know, Quebec is one of the most attractive jurisdictions in which to establish cultivation operations.
The obvious factor that attracts cannabis companies (and other industries) to Quebec is cheap power. With an abundance of hydroelectric power, Quebec offers electricity costs per kWh that are among the lowest in North America. Indoor cultivation of cannabis is energy-intensive and even greenhouse cultivation requires significant amounts of electricity for heating and/or lighting.
However, there is a second reason why cannabis companies see Quebec as particularly fertile ground for cannabis operations: a lack of Licensed Producers located in the province. On a per capita basis, Quebec ranks as the most under-serviced province for cannabis cultivation operations. Illustrating this, in the first year of legal recreational cannabis in Canada, just one Quebec-based supplier is providing 35% of all cannabis for Quebec’s provincial distribution network.
It’s the right jurisdiction for NBUD’s cultivation operations, but it was more than just location and the very large land parcel that attracted NORTHBUD to GrowPros. As noted, this is a “purpose built” cannabis facility. For NBUD’s management, this was of paramount importance – and reflects part of the learning process taking place as new companies enter the sector.
In a quest for rapid (and economical) expansion, a significant percentage of cannabis companies have gone the “retrofitting” route. In some cases, this was only a modest re-design, reconfiguring a greenhouse from growing one kind of crop to another (cannabis). But many of these retrofits, particularly for indoor cultivation operations, were done with buildings that were never previously used for agricultural purposes.
While this was a fast/cheap means of adding large square footages of cultivation capacity, it hasn’t necessarily been an efficient use of shareholder capital. Rumors abound of cannabis companies that have experienced significant “growing pains” in these retrofit operations. Indeed, word in the industry is that some cannabis companies are encountering difficulties in fulfilling supply agreements for precisely this reason.
The lesson here for NORTHBUD’s management was “do it right”: use only purpose-built cannabis facilities to not only optimize the efficiency of cultivation operations but also to maximize quality. This leads to another of North Bud’s strengths – leadership.
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The Company was delighted with its cultivation asset. It was confident in its business plan. What NBUD needed was the right person to direct these cultivation operations in order to execute on the vision of CEO Brown.
Steve Abboud is a noted expert in cannabis cultivation, with over 18 years of cultivation experience. This expertise has meant that Abboud has already been brought in by several Canadian LP’s for guidance on large-scale cultivation operations. He’s part of an international network of horticulturalist professionals. For Ryan Brown, Abboud was the right person to become NBUD’s Chief of Cultivation.
With NORTHBUD, Abboud has a ground-floor opportunity to not only build a large-scale cannabis cultivation operation, but to do so while maintaining his own, personal commitment to producing only the highest quality cannabis crops.
This leads to a fairly distinct divergence of opinion within the cannabis industry. In one camp are the companies who refer to cannabis (and grow their cannabis) as “just another crop”. It doesn’t matter whether you’re growing potatoes, tomatoes, or strawberries, so the reasoning goes, it’s all just agriculture.
Then there is the opposing camp who insist that cannabis is not just another crop. Ryan Brown and Steve Abboud are emphatic members of this latter group. Brown himself is no stranger to the cultivation side of this industry. With extensive experience in the cultivation equipment distribution side of the industry as well as considerable exposure to the early entrants in the cannabis industry, Brown also has a quality-first mantra.
"Recreational cannabis is a consumer product for which consumers demand a particular experience. It is not like wheat and corn. It is more like the grapes that make wine. B-grade grapes make B-grade wine the same way that B-grade cannabis creates B-grade user experiences."
In speaking with Stockhouse Editorial, CEO Brown referred to the “inherent variability” of cannabis cultivation. Two cultivators plant and harvest the exact, same strain of cannabis side-by-side, but using different cultivation techniques. Inevitably, there will be significant differences in not only the potency (i.e. cannabinoid content) of the two cannabis crops but even the aesthetics.
In the medicinal market, cannabinoid content is a primary determinant of the value of that dried flower. In Canada’s (soon to be) recreational market, cannabinoid content and aesthetics will determine the retail and wholesale value of this cannabis.
For Brown and Abboud, too many cannabis companies have been pursuing false economics with their cannabis cultivation: focusing on maximizing their output at the expense of reduced quality. The extra kilograms of yield aren’t sufficient to compensate these companies (or their shareholders) for the erosion of margins.
This is yet another example of cannabis 2.0 companies learning from their predecessors, but it goes further. In their zeal to claim “first mover” status, CEO Brown believes that many cannabis companies have over-committed from an operational standpoint.
The obvious example in Canada is cannabis infusion. Many cannabis companies have already staked-out large footprints in manufacturing products that are not legal in Canada today and will not be legal for (at least) another year. Additionally, while “cannabis-infused products” (CIP’s) are already referenced in pending federal legislation, there has been no definitive language of any kind as to precisely what CIP’s will become legal in one year’s time.
For NBUD, its operational strategy is to move forward with operations – decisively – with respect to areas of its business where regulatory clarity already exists, but to move much more cautiously regarding regulatory grey areas within the cannabis industry.
The Company already has a licensing deal in place with Made By Science Inc. (a subsidiary of Form Factory Inc.). Via an “encapsulation powder” (MX-17), NBUD can infuse food and beverage products with cannabis/cannabinoids. Producing these inputs with the highest (GMP) manufacturing standards means that NBUD is not only prepared for the (upcoming) Canadian market for infused products, but also positions the Company as a global supplier.
The business model for this “Cannabis 2.0” company is already turning some heads, as evidenced by some of the high-profile additions to NORTHBUD’s Board of Directors. An upcoming Stockhouse feature will delve deeper into NBUD’s operational plans.
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These operations will service two, and arguably three distinct cannabis sub-sectors: pharmaceutical-grade cannabis an input for drug development, infusing cannabis into foods and beverages, and also as an input for the cosmeceutical space.
Apart from its refined business model for cannabis cultivation and a strong, scalable cannabis cultivation operation, another reason for cannabis investors to take a close look at this new player in the cannabis space is as a value proposition. In an industry with an increasing number of billion-dollar market caps, NBUD sits with a present market cap of only $23 million.
Cannabis 2.0: new strategies and value opportunities for investors.
Appendix:
Click here to listen to an interview with CEO Ryan Brown.
www.northbud.com
FULL DISCLOSURE: North Bud Farms Inc. is a paid client of Stockhouse Publishing.