Medical cannabis producer looks to hemp to lower costs

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Marijuana Producer

This Victoria-based producer saw 51% revenue growth in the latest quarter on sales across several provinces and is now looking to drive future profits by extracting medicinal cannabis compounds from hemp.


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EMERALD HEALTH THERAPEUTICS, $3.77, symbol EMH on the Toronto Venture Exchange (Shares outstanding: 141.4 million; Market cap: $524.4 million; TSI Cannabis Quality Rating (CQR):; www.emeraldhealth.ca), produces and sells cannabis for the medical and recreational cannabis markets. The company’s head office is in Victoria, B.C.

Emerald entered the medical marijuana market through a reverse takeover of T-Bird Pharma Inc. in 2014. In 2015, it changed its name to Emerald Health Therapeutics.

The company’s 50%-owned Pure Sunfarms joint venture in B.C. is now completing a 1.1-million-square-feet greenhouse (see below); and its Agro-Biotech operation in Quebec aims to complete the expansion of its indoor growing facility from 25,000 square feet to 88,000 square feet later in mid-2019. The Quebec plant will also position Emerald to participate in the development and production of edible cannabis products, which are expected to be legal for sale in Canada on October 17, 2019.

Emerald also owns Northern Vine Labs, a research and development facility that offers laboratory services for the cannabis industry. The lab is licensed to import and export cannabis oil for the purpose of product innovation and development.

The company has also filed 17 U.S. patent applications for its precise method of calibrating marijuana dosages. Its exclusive Defined Dose formulation process is aimed at medical-use and adult-use products.

In August 2018, Emerald entered into a strategic alliance with Factors R&D Technology, one of Canada’s largest nutritional supplement marketers and manufacturers. The deal provides it access to an industrial-scale production facility. On an annual basis, the plant is capable of processing up to one million kilograms of CBD-containing hemp biomass into CBD oil; it can also produce up to 600 million softgel capsules per year. Emerald paid Factors R&D an initial $5 million fee to cover the costs of completing unique extraction methods for Emerald.

The company has also entered contracts to receive roughly 500 acres of hemp harvest in 2018 and 1,000 acres annually between 2019 and 2022. The goal is to extract low-cost CBD.

Hemp is a plant in the cannabis family with very low THC content. THC, or delta-9 tetrahydrocannabinol, is responsible for providing marijuana users with a pot-associated high. CBDs, on the other hand, are other cannabis compounds, known as cannabinoids. Researchers have been looking at the possible therapeutic uses of CBD. Processed into an oil, CBD comes in varying concentrations.

Unlike THC, which breaks down when heat is applied and it’s introduced into the body, CBD is not psychoactive. This means it does not change a person’s state of mind when they use it. However, CBD does appear to produce significant changes in the body, and some research suggests that it has medical benefits.

For its Pure Sunfarms 50/50 joint venture, Emerald is partnered with Village Farms International (symbol VFF on Toronto). Pure Sunfarms will grow cannabis at one of Village Farms’ greenhouses in B.C. That firm brings 30 years of experience and expertise to the venture. Village Farms is also one of the largest and longest-operating greenhouse growers in North America. From its more than 9 million square feet of greenhouses in B.C. and Texas, it produces several varieties of tomatoes as well as cucumbers and peppers. It then distributes them to national grocers in the U.S. and Canada.

Village Farms grows its products hydroponically (without the use of soil) in a glass-enclosed, high-technology environment. That helps to control irrigation, fertilizers, carbon dioxide, light, temperature, ventilation, humidity and other climatic factors.

The firm contributed a 1.1-million-square-foot, 25-acre greenhouse facility as its equity contribution to the joint venture. For its part, Emerald contributed $20.0 million to fund the conversion of the facility. By 2020, the partners expect Pure Sunfarms to produce more than 75,000 kilograms per year. As part of the supply agreement, Emerald will purchase 40% of Pure Sunfarms’ production in 2018 and 2019. The deal includes the option to convert other Village Farms greenhouses to cannabis production.

Through its Endo subsidiary, Emerald’s line of Endo products, which are cannabis-free endocannabinoid support supplements (Endo Sleep, Endo Brain and so on) are now available in Whole Foods Markets across the U.S. Emerald Health is promoting the Endo products as both an alternative for people not ready to try even CBD but who are curious about the health benefits associated with the endocannabinoid system, as well as a product for experienced cannabis users. However, the market for supplements is highly competitive.

Emerald’s revenue was $253,321 million in 2016 and increased 270.1%, to $937,654 in 2017. As the company invested heavily in anticipation of legalization, Emerald lost $2.9 million ($0.05 per share) in 2016. Losses increased 203.4%, to $8.8 million ($0.10 per share) in 2017.

For the three months ended September 30, 2018, revenue increased 51.9%, to $321,070 from $211,316 a year earlier. The company lost $6.4 million, or $0.05 a share, compared to a loss of $5.6 million, or $0.02.  On September 30, 2019, Emerald held cash of $52.9 million, mostly from share issues. It has no long-term debt.

With its Pure Sunfarms venture, Emerald has acquired sizeable future production capacity and has positioned itself as a large-scale, low-cost producer. It does, in fact, expect to produce cannabis at less than $1 a gram.

The company has signed supply agreements with the provinces of B.C., Ontario, Newfoundland and Labrador. However, Emerald currently has only a limited international presence. So, if a longer-term oversupply occurs in Canada—which is possible—Emerald will not have other markets for its product. This lack of international presence also means the company is ill-prepared to expand globally once other cannabis markets are legalized. To do that, it might look to acquisitions, which could add risk.

Emerald Health Therapeutics has a 3-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.

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