The legalization of recreational marijuana use in Canada is imminent and will change the economic landscape. Licences have been obtained, space is purchased, and capacity is planned. There are many unknowns, and the business plan cannot be fully established because of these unidentified variables.
~
However, forward-thinking companies like Harvest One of Vancouver, British Columbia are poised to hit the ground running in this new industry. We spoke with Colin Clancy, Vice President of Investor Relations, to learn more.

Harvest One began in April 2017 as a reverse takeover of United Greeneries and Satipharm, which are now two subsidiaries under Harvest One. Andreas Gedeon, the current CEO and Managing Director, had set up United Greeneries and Satipharm. Then, in 2014, regulations began to change in Canada.

“United Greeneries was issued a license to build, and at that point, they decided they wanted to begin building out a global footprint. They partnered with a company called MMJ Phytotech, the first publicly traded cannabis company in Australia, which acquired one hundred percent of the assets. Andreas assumed the CEO position of that company. Essentially, it was a shell looking to invest in cannabis companies at the time,” says Clancy.

United Greeneries’ Duncan facility was built out over the course of a couple of years. In 2017, the capital markets in Canada were very buoyant compared to those of Australia and, by the end of 2017, it was decided to have a reverse takeover in Canada. This is how Harvest One began. With the initial public offering, $25 million was raised for 40 percent of the company, and MMJ Phytotech retained 60 percent.

“We were the thirty-fourth company to get the actual cultivation license, and as we speak, there are approximately 100 licences issued. To date, there are only thirty-three companies that possess a sales license, I believe. We work very closely with Health Canada on everything we do,” says Clancy.

The industry is highly regulated, from how the facilities are built to good production practices (GPP), genetics, testing and marketing, to name a few. Harvest One currently has twelve people on the corporate side and thirty-five who work under United Greeneries. As a part of that, there are also approved personnel licensed by Health Canada.

Harvest One is the umbrella company over United Greeneries and Satipharm. United Greeneries is the cultivation arm and deals with the production of the actual flower. It holds a cultivation license issued by Health Canada in 2016 as well as a sales license granted in 2017. Satipharm, on the other hand, operates on the medical and pharmaceutical side of cannabis. It is dedicated to producing oral delivery technology for cannabidiol (CBD).

“Only a few other approved companies use our business model. We have done it for specific reasons to separate everything out. Andreas’ vision is to touch on the entire value chain of cannabis and we do that through Harvest One,” says Clancy.

The logic behind this is that United Greeneries is stringently regulated and tied to the license issued by Health Canada. Andreas wanted a company that could make strategic investments in everything from technology to product branding; Harvest One provides the ability to do this.

There are many difficulties associated with operating in a shifting market. Take marketing and branding as an example. The new regulations, which have not yet passed, are very onerous and controlled. The regulations, as they currently exist, appear to regulate packaging well beyond what you see in the tobacco or alcohol industry.

“It is going to be a very bland packaging scenario so, in this environment, you have to be very adroit and able to change gears on a regular basis. We have set it up so that we are quite nimble. It’s not just about growing, but also the innovation aspect and technology. We are assessing a whole range of possibilities both within and outside of the cannabis sector,” says Clancy.

In the short term, there will likely be an undersupply come legalization. Next year, once all the massive cultivation facilities are built there could very well be an oversupply of product which could cause serious pressure on pricing.

This is a changing industry, and any given company can get into trouble quickly unless it has solid diversification strategies and contingency plans. A year ago, when the licenses were first given out, they were seen as a golden ticket of sorts. Now, the key to a strong cannabis company is moving beyond simple licensed production capacity. People want to see innovation, diversification and corporate strategy that displays a forward-thinking attitude.

United Greeneries will increase production capacity from 1,000 kilograms per year to 20,000, a figure chosen because it is manageable. Its focus is on quality when it comes to production and diversification when it comes to spending their $80 million of investment capital.

“We are aiming for 20,000, but that may not be the final number. We will re-evaluate at the end of 2018 based on certain variables and regulations in the industry. If they allow outdoor growing, that will be our focus to build capacity,” says Clancy.

No one knows for sure what the market will look like after everything becomes recreational. By the end of 2018, Harvest One can quickly scale up to whatever amounts are needed due to its prefabricated modular technology. If additional production capacity is required over the next few years, it can happen, but the ability to grow outdoors would significantly change the company’s production strategy.

Harvest One’s emphasis on being nimble and ready for whatever the end of 2018 brings makes the team ready to take the changes on from a variety of angles. The potential to grow outdoors and the possibility that the majority of the product might be imported from abroad, where it can be produced for a fraction of the cost, could seriously affect the market.

“We have to wait until the end of 2018. We could have put $80 million in the bank for capacity expansion and build it out to 50,000 to 60,000 kilograms per annum, but we don’t know what the market will look like come late 2019,” says Clancy.

There is a great deal of competition in Harvest One’s backyard. The anticipation is that there will be 1.1 million kilograms produced by next year by licensed producers, but the demand might not even be half of that. Harvest One has decided to approach things from a different angle by diversifying its holdings with Satipharm and, for a minimal investment, planning a forward-thinking outdoor growing strategy. Harvest One’s nimble strategy allows the company to cover all angles and re-evaluate as regulations change.

In November of 2017, the possibility of outdoor growing was brought forward by the government, and it may be legal in the next few months. In the latest iteration of regulations and guidelines, it is said that the conversations have been positive and supportive of this.

“In November, on the back of that inclusion, we bought four hundred acres of pristine agricultural land in a certain part of B.C. that we believe is one of the only viable areas for large-scale outdoor production in Canada. It has very similar climate characteristics to Northern California, where outdoor growing is prevalent,” says Clancy.

Andreas planned all along to pursue an outdoor strategy, the reason being that this type of cultivation has a fraction of the expenses compared to indoor grow operations. However, there are very few regions in Canada where this can be accomplished on a large scale. Harvest One is investing a modest portion of its capital toward site preparation.

If the right to grow outdoors is passed, this should be known going into July of 2018, then Harvest One will be ready for the 2019 growing season. The company will plant in May and harvest in September like most annual crops.

“We anticipate approximately 50,000 kilograms to come from our outdoor cultivation, which will complement our indoor 20,000 kilograms of high grade cannabis,” says Clancy.

It will be a different type of product altogether, more sustainable, naturally-grown outdoors, and Harvest One believes there will be a place in the product mix for that. It is a portion of the strategic company plan, but Harvest One is not dependent on it. If allowed, the company has an advantage, since purchasing that very valuable property will give it a significant head start going into 2019.