October 9, 2018

VIDEO: Ascent Industries Corp (CNSX:ASNT) License Suspension and Denmark Play

Midas Letter
Midas Letter
VIDEO: Ascent Industries Corp (CNSX:ASNT) License Suspension and Denmark Play

Ascent Industries Corp (CNSX:ASNT) (OTCMKTS:PGTMF) CEO Philip Campbell addresses Health Canada’s partial suspension of licenses for Ascent’s wholly owned subsidiary Agrima Botanicals Corp after a failed surprise inspection in August. Ascent takes compliance and regulatory issues seriously and anticipates having its licenses re-instated by Health Canada. Agrima is a global cannabis company, one of the few licensed in both the US and Canada. The company has applied for licensing in Denmark, so it can export cannabis oil products produced in Canada to Denmark as well as wider European Union markets. Ascent’s goal is to maintain high margins as the market matures and as such will operate in both the medical stream and produce consumer packaged goods in the recreational cannabis space.


James West:   Hey, welcome back. My guest this segment is Philip Campbell. He is the CEO of Ascent Industries Corp., trading on the CSE under the symbol ASNT. Philip, welcome.

Philip Campbell:   Thanks for having me, James.

[stock_chart symbol=”ASNT:CNX” align=”left” range=”1M”]

James West:   Philip, we’re going to start with the elephant in the room, just to get it out of the way: there’s some issue with Health Canada partially suspending some licensing with one of your subsidiaries. Can you give us an overview of what happened, and how you’re going to deal with it?

Philip Campbell:   Yeah, absolutely. You know, first and foremost, Ascent Industries takes regulatory compliance very seriously, and this is obviously not something that we’re very proud of. And it’s something that we’re going to remedy very quickly.

To go over the incident, what happened is, we had a surprise inspection from Health Canada of Agrima Botanicals, our wholly-owned licensed producer, in August, and during that inspection it was clear that there were some deficiencies that needed to be addressed.

Unfortunately, last week we were notified that our licenses were going to be partially suspended. In response to that inspection, we’ve already actually implemented a strategy to address some of the deficiencies that came up during the inspection. So we’d already begun to hire some highly qualified pharmaceutical experts to be able to help to bolster our team, especially in the quality assurance and regulatory compliance department of our company.

So you know, we do take compliance very seriously. We are actively looking at everything to ensure that this never, ever happens again. We’re going to continue to keep our shareholders and the investment community apprised of any updates as they become available, as we have been doing. We’re going to be transparent about this process, and work very hard to ensure we get those licensed reinstated and stay fully compliant with Health Canada’s expectations, and make sure that this never happens again.

James West:   Interesting. Okay, so safe to say, then, that this is a temporary phenomenon and we’re going to attribute it to growing pains?

Philip Campbell:   Yeah. We definitely see it that way. We’re going to hopefully look back on this in a few years from now and see it as something that made our company stronger, and that we’re able to persevere through this. And, you know, we do look forward to getting our licenses fully reinstated so that we can continue to develop our business.

James West:   Sure. Okay, so tell me about the Ascent Industries business model and the business of its subsidiary, Agrima Botanicals.

Philip Campbell:   Sure. So Agrima is a global cannabis company. So we’re one of the few companies that’s licensed in the United States and in Canada. We focus on brands, consumer packaged goods, and science; those are some of the core tenets of the business that we focus on.

Agrima Botanicals is our wholly owned subsidiary. It’s a licensed producer in Canada, so we have a cultivation license, an oil/extraction license, and a dealer’s license. So we’re one of just a few companies that hold all of those licenses.

The goal of Agrima is to produce very high quality products, both the flower and especially oil products. So we want to be able to access the Canadian market with those products, as well as international markets. That’s why we’ve applied for licensing in Denmark, so that we can export those products we manufacture here in Canada into the Danish market, and then be able to service that domestic market in Denmark, and also to use that as a landing point into Europe to then export into other markets as they become available.

James West:   Sure. So as an EU member, I guess it doesn’t really matter where you start; you can distribute pretty easily to the rest of Europe?

Philip Campbell:   That’s right. They do have the ability to, once you’ve been approved for European Good Manufacturing Practices with the Danish Medicines Agency, that’s also transferable to other countries within the European Union. So we’ll be able to use that certification to be able to export those products throughout the rest of Europe as new markets open up. You know, Germany is legal already; the United Kingdom just announced recently that they’re going to legalize, so there’s a lot of opportunities there; 750 million people. So we’re very focused on that emerging opportunity.

James West:   Sounds exciting. So you focus, then, more on the medical side, or are you hoping to also capture the recreational side? A combination of both?

Philip Campbell:   Yeah, definitely a combination of both. Our goal is to maintain high margins as the market starts to mature, so we’re focused on the consumer packaged goods side of the industry; you know, branding products. We think that, as the market matures, there’s going to be a commodification of the cultivation aspect of the business, and the companies that are focused just on cultivating are going to see their margins erode, and obviously their profits as well.

And so what we’re focused on is looking at the high-margin opportunities, which is in the medical stream, and on the consumer packaged goods within the adult use segment of the market. So we’re looking to do a few things really, really well, and then start to build from there.

So on the medical side, we’re looking to do gel caps and tinctures, and then on the adult use side we’re going to do vape pens and pre-rolls.

James West:   Interesting. So you’ve got a growing operation, but you’re not married to that as the future of the company; you’re looking at it more as a higher-margin consumer packaged goods play?

Philip Campbell:   Yeah, definitely. In the short term, there’s going to be a shortage of product in the Canadian marketplace; you know, there’s going to be shortages across the country, and so for us, to de-risk our business and ensure that we have enough input material to feed our extractors, we had to get a greenhouse to ensure that that aspect of the business was de-risked.

As the market matures and it becomes more global, we see the cost of goods being reduced by potentially inputs from other equatorial, lower-cost growing regions, and so we see that, you know, investing large amounts of capital into big greenhouses here in Canada might not be the best decision long-term, and that really focusing on that value-added end of the chain is really the most strategic. And companies that are just focused on cultivating, I think they’re going to have a lot of margin erosion in the years ahead.

James West:   So, to what extent do you think that the, there’s a couple of instances of bio-synthetic cannabinoid producers; in one case, Hyasynth out on the east coast is growing it through genetically modified yeasts, and then this subsidiary of Cronos Group is doing some kind of DNA engineering to recreate the whole profile of cannabinoids, but again, biosynthetically. Is it likely, in your opinion, that in the future you would source cannabinoids for your products from the lowest-cost producer or supplier of cannabinoids, and not have the growing operation functioning except to service potential premium flower opportunities?

Philip Campbell:   I think that the general consumer has an aversion towards genetically modified organisms, and I think in the cannabis industry especially, cannabis consumers are particularly apprehensive towards that. So I think that the market might not reward companies that focus on that, especially in the adult use segment. I think that that could be a viable business model for pharmaceutical-type products, where having that single molecule is important.

But I also see that, as the market does mature and the global opportunity starts to expand, that the low-cost growing regions will be able to produce it for pennies on the dollar. You know, like, just, for grams, they can be produced for less than $0.10 a gram. So when it comes to that level of scale, it’s going to be difficult for – it’ll be so cost-effective for companies to be able to access that type of input material for the extractors, that I think that that’s the route that we’re going to go with our business model.

James West:   Interesting. Okay, so then, in terms of the European market, Germany has gone legal for medical purposes, and the UK has announced an intention for medical purposes. Is there any sort of momentum building for a general recreational use of cannabis Europe-wide?

Philip Campbell:   You know, I think that societies across the world are now starting to open their eyes to medical. Typically if you look at the United States and Canada as examples, the medical market opens up and then a few years later, the adult use and recreational markets open up. So I think that that trend will continue, and it seems like it’s accelerating. If you look at the United States, a lot of states, the period of time that goes between medical and adult use approval is getting shorter and shorter. So I think that trend is going to continue to happen globally, especially as new tax revenues are going to be able to be created through this legalization.

You know, there’s very few ways for governments to create new sources of tax revenue, so I think that’s something they’re going to pay a lot of attention to; will be a big determining factor as that starts to open up.

James West:   You mentioned that you saw growth of cannabis moving towards equatorial zones just because of the natural affinity for freer and cheaper energy there, I guess, that comes from the sun. And you sort of categorize that in the context of the commodification of cannabis, which is a theme that I agree with completely, so it’s refreshing to hear a company actually looking at it that way. How low do you think that the price of cannabis can go in the commoditized environment where only the lowest-cost producers can survive?

Philip Campbell:   Well, I think the best analogy or the best industry to look at that is the hemp industry. You know, hemp has been grown outdoors, it’s the same plant, essentially, as the cannabis plant, and you can buy hemp right now in the United States, in the states that are legal to do so, for $20 a pound or even less than that. So if you look at that as a cost per gram, it’s, you know, about $0.05 per gram, and I think that cost is going to continue to come down.

Hemp farmers are still producing $10,000 per acre, which in the traditional farming sense is quite a lot of revenue per acre compared to some other traditional crops. So I think that pricing compression is going to continue to happen. We’ll see prices per pound, once there’s very large-scale production of THC products, I think they’ll get even cheaper than that. So that’s why we’re focused on the commodification and being able to ensure that we can maintain our margins over the long term.

I think the other important factor to consider is that if you look at the trends in the United States, in the states that do have recreational or adult use programs, increasingly, the non-flower products are gaining more market share. You look at Oregon, they’re at 54 percent now is non-flower sales. I think as the market matures it’s going to be about 70 to 80 percent of the market is going to be these non-flower products. And the input that goes into making those is oil.

So whether it’s grown in an indoor facility or outdoors, it doesn’t really impact the quality of that final product, if it’s a chocolate bar or a gummy or whatever that product is. So, really making sure that you have a really low cost input to make that oil to formulate those products, I think, is going to be the key to ensuring that high margin over the long term.

James West:   Okay, so great, then, looking forward into the rest of Q4 2018 and the first half of – or, let’s say, all of 2019, what do you see as the main catalysts that are going to be value catalysts for the shareholders in Ascent?

Philip Campbell:   Definitely, great question. We have a lot of exciting catalyst, and the first thing is getting our licenses fully reinstated; that’s something we’re working diligently towards, and ensuring full compliance with the regulators there. Once that’s done, we’re going to be able to get our sales license in Canada, which is a significant value for the shareholders and for the business. And then after that, we’re looking to get our greenhouse license and our lab license in Canada. So we’ll have three facilities in Canada: an indoor hydroponic facility, which is already licensed; the greenhouse, which can do 60,000 kilograms a year; and then the lab, which is an industrial extraction manufacturing facility, and then the last catalyst is the Danish license.

So we anticipate all of those things happening within the next six months, so our sales license, greenhouse license, lab license, and Danish license. So there’s some significant milestones ahead of us.

James West:   Sure. So with the effect of the suspension, this makes Ascent a buy, arguably, at this point.

Philip Campbell:   Yeah, I would like to think so, and I think we’re fairly favourably valued compared to some of our peers. And looking forward to accomplishing those milestones for our stakeholders.

James West:   Okay, great. Well, that’s an awesome introduction to the company. We wish you the best of luck in sorting out the issues with Health Canada, and we’ll look forward to having you back in a quarter’s time when smooth sailing has resumed. Thanks for joining me today.

Philip Campbell:   Yeah, thanks for having me. Much appreciated.


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