Canadian Cannabis Presents Opportunities in Cultivation and Retail

NetworkNewsWire Editorial Coverage: For the very first time, a developed country stands at the precipice of legalizing recreational cannabis. Despite a slight delay from the original July 2018 legalization goal, industry analysts agree that Canada is on course to fully legalize recreational marijuana in August or September of this year, clearing the way for adults aged 18 and over to legally purchase the drug from licensed dispensaries across the nation. For companies like Choom Holdings, Inc. (CSE: CHOO) (OTCQB: CHOOF) (CHOOF Profile), Aurora Cannabis, Inc. (TSX: ACB) (OTCQX: ACBFF), Namaste Technologies Inc. (CSE: N), Emerald Health Therapeutics, Inc. (TSXV: EMH) (OTCQX: EMHTF) and The Supreme Cannabis Company, Inc. (TSXV: FIRE) (OTC: SPRWF), this unprecedented regulatory shift is likely to unleash huge opportunities across multiple industry sectors, most notably cultivation and retail operations.

Barriers to Entry

Demand for recreational cannabis in Canada is still, to some degree, a mystery. As a forerunner in the legalization of recreational marijuana, Canada will likely serve as a measuring stick for other countries that are interested in following suit. However, based on various federal and provincial reports, legislators have estimated that nationwide demand could come in at around 800,000 kilograms annually, with the market expected to experience sustained growth in the coming years. The push to address this forecast demand has resulted in a number of cannabis industry heavyweights, with their positions in the market being bolstered by the significant barriers to entry that exist for would-be Canadian cannabis producers.

Currently, cannabis production operations fall under the jurisdiction of the Access to Cannabis for Medical Purposes Regulations (ACMPR). Introduced in 2016 as a replacement for the Marihuana for Medical Purposes Regulations, the ACMPR is administered by Health Canada with the goal of licensing and overseeing the commercial cannabis industry. Companies interested in cultivating cannabis for the Canadian market are required to undergo a complex, seven-stage permitting process under the ACMPR that commonly takes more than a year to complete (http://nnw.fm/g71zA). As a result of this complexity, the firms that successfully navigate the regulatory hurdles associated with the ACMPR to become licensed cannabis producers often achieve significant PPS increases in the wake of approval (http://nnw.fm/jbu2A).

Navigating the Changing Tides

Choom Holdings, Inc. (OTCQB: CHOOF) (CSE: CHOO) is one company that’s strategically positioned to capitalize on this post-approval trend in the near future. Choom currently has acquired two ACMPR applicants and has agreements in place to acquire two additional ACMPR applicants, fortified by its recent addition of Saskatchewan-based High Way 10 and parent company Flower Power Cannabis Pharms (http://nnw.fm/Xf26v). As the company noted in a news release announcing the acquisition, High Way 10 is currently in the active review stage of Health Canada’s rigorous application process. Following the completion of select tenant improvements to its existing 16,000-square-foot facility, Flower Power intends to submit its affirmation of readiness (“AOR”) evidence package to Health Canada, which could result in the receipt of a cannabis cultivation license shortly thereafter. If approved, Choom estimates that High Way 10’s current facility is capable of producing approximately 1,500 kg of dried cannabis per year, with plenty of room for future expansion.

Notably, Choom’s efforts to scale up its production capacity ahead of the anticipated summer 2018 legalization of recreational cannabis have spanned multiple provinces. On April 19, the company announced its entry into a definitive agreement to acquire Island Green Cure Ltd., an advanced-stage cannabis production license applicant located in Vancouver Island, British Columbia (http://nnw.fm/5ZmQQ). Choom notes that Island Green Cure is currently at the Confirmation of Readiness (“COR”) stage of the ACMPR application process.

While Choom has remained committed to expanding its production capacity in recent months, the company has also turned its attention to the retail side of the nascent industry. Unlike cultivation, which is regulated at the federal level, recreational cannabis retail programs will be developed and enforced by individual provinces. For this reason, Choom’s recent efforts to diversify its geographic footprint into new jurisdictions, including its entry into Saskatchewan through the High Way 10 acquisition, could prove to be fruitful.

The Future of Retail

Although the exact launch date of recreational cannabis in Canada isn’t yet known, the future of the industry, at least from a retail perspective, is currently being developed. Multiple provinces across the country have already outlined details for their retail programs. The Saskatchewan Liquor and Gaming Authority (SGLA), for example, last month announced plans to commence issuing retail permits. Timing could prove to be key for prospective retailers in Saskatchewan. The SGLA has limited the number of permits to 51 for the first three years in an effort to ensure a controlled rollout (http://nnw.fm/BB5zT), and other provinces have detailed similar restrictions. Choom has already made moves to secure its portion of this retail landscape. In an April 17 news release, the company noted that it has already secured nine retail locations in Alberta and seven in British Columbia, as well as submitting 32 applications for retail permits in Saskatchewan (http://nnw.fm/oC8TP). The SGLA is expected to award permits via lottery by June 2018.

Choom’s retail plans go beyond permits and regulatory filings. In January, the company released a concept retail store design (http://nnw.fm/n2N2a), and it intends to develop a chain of branded dispensaries in jurisdictions across Canada. Supporting these plans, Choom recently entered into a binding agreement with ABcann Global Corporation (http://nnw.fm/X3eUt), one of Canada’s premier growers, through which ABcann will supply Choom with premium cannabis products, subject to regulatory approval. The company marked this deal as a strong endorsement of its strategy and a pivotal step in developing Choom as the premium retail brand in Canada’s burgeoning recreational cannabis market.

Promising Market Trends

Diversification into both cultivation and retail operations could prove to be a lucrative opportunity for Choom. Aurora Cannabis, Inc. has established itself as an industry heavyweight in recent years by leveraging a vigorous growth strategy to rapidly expand its cultivation capacity. Following its acquisition of 71 acres of land in Alberta, Aurora is on track to yield in excess of 430,000 kg of cannabis per year at some point in the future. Add on Aurora’s acquisition of Saskatchewan-based CanniMed Therapeutics, which was noted as the ‘most expensive pot buyout in history’, and it’s clear that an aggressive approach to M&A is a key growth driver throughout the cannabis industry.

Much like Choom, Aurora has also placed focus on addressing the flourishing retail sector of Canada’s recreational cannabis market. In February, the company announced its completion of a strategic investment in Liquor Stores N.A. Ltd. aimed at establishing and launching a leading brand of cannabis retail outlets. Through this blended approach to cultivation and retail, Aurora has achieved considerable PPS growth. The company’s Canada-listed shares rose from C$3.08 in November 2017 to a high of C$14.79 by mid-January.

Namaste Technologies Inc. is taking a similar approach to growth through acquisitions, aiming to execute on a vision of becoming an all-inclusive online cannabis marketplace. Through wholly owned subsidiary Cannmart Inc., Namaste received an ACMPR production license on March 19 (http://nnw.fm/g04sV), just under two months after the company announced its reception of a Health Canada Confirmation of Readiness (“COR”). Following news of Cannmart’s ACMPR approval, Namaste’s Canadian shares rose to C$2.31, up from C$1.60 in late February.

Prior to receiving ACMPR approval, Cannmart entered a definitive supply agreement through which it committed to purchase, in 2018, 1,000 kg of medical cannabis from Supreme Cannabis Company, Inc. subsidiary 7ACRES. John Fowler, CEO of Supreme, noted the importance of supply agreements such as these in a news release (http://nnw.fm/QPth6). “As a cultivation focused Licensed Producer we rely on strong retail partners to provide us access to consumers and favorable brand positioning,” Fowler stated. Diverging from the integrated strategy of Choom Holdings, Namaste, through Cannmart, is positioning itself as a “sales-only” entity.

While many in the Canadian cannabis market look toward new construction and acquisition for growth capacity, some industry players are taking other approaches. Emerald Health Therapeutics, Inc., for example, is partnering with British Columbia-based Village Farms to increase production capacity while simultaneously bolstering the margins of traditional greenhouse farms (http://nnw.fm/sX9BP). This approach, utilizing established agricultural producers to expand capacity, is typically cheaper and faster than the construction of new facilities, as well as providing the opportunity, in many cases, to work with experienced growers and farm staff.

On the Clock

With the legalization of recreational cannabis in Canada expected to occur in a matter of months, the future of what Deloitte has forecast could be a $22.6 billion industry is already taking shape (http://nnw.fm/1iYFF).  Companies with the foresight to position themselves in both the cultivation and retail markets figure to benefit most from the rising tide of cannabis spending throughout Canada. With that in mind, it should come as no surprise that industry upstarts like Choom Holdings, with its four late-stage licensed producer applicants and detailed retail strategy, are urging the investment community to ‘Say Hello’ to the next big thing (http://nnw.fm/H6AnE).

For more information on Choom Holdings, Inc., please visit Choom Holdings, Inc. (OTCQB: CHOOF) (CSE: CHOO).

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