Avicanna is Set to Become a Leader in Colombian Cannabis

    Our site visit showed us that Avicanna Inc. (TSX:AVCN) is likely going to be one of a few companies to reach cash flow this year

    Patrick Smith | August 20, 2019 | SmallCapPower: In June 2019, we visited Avicanna Inc.’s (TSX:AVCN) two fully-licensed assets located in the northern Caribbean region of Colombia. Both of Avicanna’s majority-owned and operated assets, Santa Marta Golden Hemp (SMGH) and Sativa Nativa (SN), are located within a 30-minute drive east of Santa Marta, a popular tourist coastal city that is ~1,500 km from the Equator. There are no direct flights to Santa Marta from Canada but there are several local airlines that fly there. It is about an hour and a half flight north from Bogota (Colombia’s capital).

    Santa Marta has excellent infrastructure, ideal for a cannabis cultivation operation. The city’s economy is dominated mainly by tourism, trade, fishing, and agriculture. The primary agricultural products within the region are bananas, cocoa, coffee, cassava, and, now, cannabis. Santa Marta has a population of ~500,000 and is the fourth-largest city within the Caribbean Region of Colombia. Santa Marta has a major port and the airport is located 10km from the centre of the city. When Avicanna is ready to ship cannabis oil by year-end, Santa Marta’s port and airport should easily support trading operations.

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    Idyllic growing conditions and a long history of high-quality agriculture. SMG and SN are located in the fertile lowlands, which are bordered by the Atlantic to the North and the Sierra Nevada mountain range to the south (Figure 1). Santa Marta mountains are the highest peaks in Colombia, reaching 5,775m above sea level (Encyclopaedia Britannica), with the lower slopes of the mountain hosting ideal tropical climates for agriculture and livestock. When driving on Highway 90 (which runs east all the way to Venezuela), located to the north of the mountain range and south of Tayrona National Park, viewers will notice an abundance of agricultural land. For instance, Figure 2 shows hundreds of acres of bananas from one farm. These bananas are organic (require specific health and safety rules) and are grown for Dole at very low costs – it is quite possible you may have bought these from your local grocery store. In the medium to long term, it is hard not to envision these large parcels of land growing hemp. Similar situations have occurred in the U.S. For example, due to the much higher returns on hemp, it is not uncommon for a farmer to switch from tobacco to hemp. The opportunity cost for growing hemp is very attractive, as Colombia provides optimal growing conditions with 12 hours of sunlight year-round and low relative humidity. This allows for four harvests a year without artificial light. This same phenomenon of farmers switching to cultivating hemp is occurring in Colombia.

    Figure 1: Satellite Map of Santa Marta (left), the Caribbean Sea (North), Highway 90 (Along the Arrow), and the Sierra Nevada National Park (South)Source: Googlemaps

    Figure 2 & 3: View of Banana Plantation Farm from the Highway and a Closeup of Recently-Harvested Organic Bananas for DoleSource: Ubika

    At first, we visited SMGH, where the main operations are located. The majority of the infrastructure is located within a secured compound. This includes greenhouses, shadehouses, local corporate offices, a 10,000 sq. ft lab, workers’ buildings and drying crates (Figure 4). The facility was bustling with activity. The number of workers was estimated to be 140 and another 100 are expected to be on site within the next few months. According to management, ~40% of the workforce are locals. Security was visible inside and outside the facility. Of note, SMGH is 60% owned by Avicanna.

    In Colombia, strains need to be registered with the government before characterization and evaluation of the genetics can begin. Prior to this, cultivators had to register psychoactive and non-psychoactive seeds with the Colombian Agricultural Institute (ICA). By the end of 2018, licensed companies had the opportunity to register seeds without any record of origin. Approximately 25 companies, public and private, registered seeds with the ICA. Avicanna, through its subsidiaries SMGH and SN, registered 80 total strains for characterization.

    Once the strains are registered for evaluation, companies can begin a characterization process to ultimately register the genetics for commercial purposes with the Ministry of Agriculture (ICA). The process involves growing and testing two full harvests of at least 60 plants per genetic. The main variables that are analyzed are the cannabinoid ratios and other physical and chemical properties of the plant (non-psychoactive plants need to be below 1% THC) that meet the ICA’s commercial sale conditions. Currently, of the more than 25 companies that have registered seeds with the ICA, only six companies have registered as cultivators and are ready for commercial production (Source: MJBiz Daily). These include SMGH (a subsidiary of Avicanna), Pharmacielo, Medcann (Private), Clever Leaves (Private), and FCM Global (Private). Interestingly, the price of seeds in Colombia range between $2 and $3/seed. A grower can sell ~2000 seeds per plant – this could scale well and become a material amount of cash flow in the future.

    Figure 4: Overhead Pictures of Several GreenhousesSource: Avicanna

    Within the cultivation facility, Avicanna has a variety of structures to facilitate the vegetative and flowering stages. At both grow sites, the Company establishes each growing section to be 1 Ha each (~107,600 sq ft). From there, Avicanna splits the Ha into 4 quarters. Each ¼ Ha hosts ~4,000 plants. Each plant is estimated to produce 150-200 grams.

    With over 10 harvests under its belt in 2019, management confirms the overall cost per gram of flower to be in the $0.10 per gram range. This compares very favourably to Canada and the U.S., where good costs are around the US$1.00-US$1.20/gram range. This low-cost ability could make Avicanna a cultivation competitor on a global scale. For outdoor grows shown in Figure 4, cost/gram could be even less.

    In terms of production, the Phase 1 combined capacity of both operations will be ~410,000 sq. ft. SMGH was the first asset we saw and was a few months further ahead than SN. At SMGH, after Phase 1, the Company expects to reach 290,000 sq. ft with an expected production of 1,400 kg of dried flower/year by the end of 2019 (annual – 16,800 kg).

    Figure 5: Inside a Propagation Tent – Requires 18 Hours of Sunlight

    Source: Ubika

    Figure 6 & 7: Inside Another Shadehouse, As Seen on Left, Each Sectioned Area is Growing a Different Registered Strain Source: Ubika

    As shown in Figures 6 and 7, one out of four sections in this hectare is used for a 3-5-week vegetation cycle. Since sunlight in Colombia consistently lasts for 12 hours, some artificial light is necessary to extend the growth cycle during this vegetation period, otherwise the plants could begin flowering prematurely. Lights, as seen in Figure 6, are turned on for 6 hours once it is dark. When the plants mature to a size the growers are comfortable with (each strain is optimized for yield differently), they are then transplanted to another greenhouse/shadehouse, where no additional lighting is used. Over the next 6 to 8 weeks, these plants flower and are harvested, then replaced with more vegetative plants when ready. The conditions of Santa Marta provide optimal conditions to maximize the number and amount of harvests.

    Figure 8: Inside one of the ShadehousesSource: Ubika

    Figure 7: Inside One of the Greenhouses

    Source: Ubika Research

    Figure 9: Inside One of the Greenhouses at SNSource: Avicanna

    SN was the second asset we reviewed on the site visit. It is only a few minutes drive away from SMGH. For Phase 1, the Company expects to reach 120,000 sq. ft, with an expected production capacity of 6,000 kg of dried flower/year. Of note, SN is 63% owned by Avicanna.

    Figure 10 & 11: Outdoor Growing Section at SMGHSource: Ubika

    Seen in Figures 10 and 11, these outdoor plants were about 5-6 ft high. These plants have limited assistance other than strings to hold the plants up (see Figure 9).

    To follow the SMGH and SN facilities, we visited Avicanna’s extraction lab, which uses ethanol-based extraction equipment.

    Extraction efforts are particularly important for a Colombian cannabis company as it is illegal to sell flower. All the cannabis grown at SMGH and SN needs to be extracted and processed to be sold.

    The main advantages of ethanol extraction over C02 is scalability. To put that into perspective, the previous C02 system processed ~15 kg/day. The new extraction machines are anticipated to have the ability to process ~15 kg/hour/machine. This is ideal for a large cultivation operation at SMGH and SN. By using one shift (8 hours) 7 days a week, this implies a run rate of ~ 3,360 kg/machine/month, which would be more than enough to fully process the anticipated Phase I cultivation output.

    Ethanol is considered one of the safest extraction methods. Importantly, it is much less difficult and time consuming to train operators in the proper and safe use of the equipment.

    Avicanna has a majority stake in two fully-licensed assets in Colombia, SMGH and SN. The Company is one of a handful of Colombian operators that has its cultivars registered by the ICA, a requirement to be able to cultivate for commercial purposes and generate revenue. Importantly, final products are going to be produced under Good Manufacturing Practices (GMP) requirements.

    Avicanna is primed to be one of the first cannabis companies in Colombia to generate cash flow under legal standards. In conclusion, the site visit showed us that Avicanna is likely going to be one of a few companies to reach cash flow this year. Due to prudent planning and effective use of proceeds, the Company’s assets are structured to gain significant scale over the next one to two years as it ramps up towards full capacity. Avicanna began trading on the TSX on July 18, 2019. Based on the last closing price, Avicanna is trading at a market capitalization of $105.8M. The most comparable peers of Avicanna’s cultivation assets are Pharmacielo, Khiron, and Blueberries Medical, which trade at $530.8M, $224.4M, and $28.4M, respectively.

    Visit Avicanna.com to download the corporate presentation and find out more about the Company.

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