VIDEO: Biome Grow Inc (CNSX:BIO) CEO on Largest East Coast Supply and Production Agreement
Biome Grow Inc (CNSX:BIO) CEO Khurram Malik explains how the company’s approach to the crowded Canadian cannabis space is different. Malik indicates that the level of automation in Biome’s facilities sets the company apart from other producers as automation is the key to creating consistent products. Biome’s state-of-the-art facilities are modular and the smaller grow rooms protect crops, produce better products, and are just as cost effective as the large “sea of green” growing spaces other Canadian LPs use. Despite going public in early October, the company’s stock hasn’t taken off but Malik hints that Biome has major announcements coming in the next few weeks that should boost its shares. Biome is looking to enter new international medical markets with a first-mover advantage.
James West: My next guest is Khurram Malik. He is the CEO of Biome Grow, and Khurram, welcome back.
Khurram Malik: Hi. Good to be here.
James West: Biome put out a pretty impressive press releasee that you have executed a supply agreement with the provinces of Newfoundland and Labrador, which is the biggest one done to date among all Canadian LPs?
Khurram Malik: The largest in Atlantic Canada; I think it’s in the top four or five of all Canadian LPs, so it goes beyond a supply agreement. We hear a lot about supply agreements to market today, and those are, let’s say, the LCBO or the OCS here in Ontario will ask an LP, We need product for this and this month; give us, that’s a supplier agreement, and two months later, they’re going to ask for more.
This is a 20-year economic agreement with the province of Newfoundland. It’s got kilograms in there, it’s got five retail locations in there, it’s got a payback on CapEx as well, so it goes well beyond your run of the mill supply agreement.
James West: Okay, so bottom line, what does that mean to the balance sheet in the next quarter?
Khurram Malik: Sure. We will probably do, purely based on this, if we deliver everything we’re going to deliver, it’s 40 million of revenue initially; 100 million of revenue starting in 2020, another 100 million in revenue starting in 2021. For a company of our size, that’s pretty sizeable.
So as we’ve 6talked about on this program before, we’re building a different sort of cannabis company which has a different risk profile. And what I mean by that is, as we finish building our facilities, our goal is to have production sold off for years to come before the facilities are finished being constructed. So we’re going to be both domestically and overseas, so we’re going to be sold out for years to come. And that’s a very different gross profile than, you know, putting a million square feet in Ontario and hoping there’s a market for this year and next year and maybe the year after.
James West: That’s really an interesting idea. I’m wondering what the, you know, in terms of the CapEx relative to selling out for years going forward, there must be some exposure to the concept of the price of cannabis going down while you’re still constructing, and is there a risk that, you know, you finish your facility, your supply agreements going out suddenly need to be adjusted because the price of cannabis has collapsed while you’re finishing your facility?
Khurram Malik: Yeah, so the supply agreement calls for volume; it doesn’t call for pricing, per se. There’s some price targets, and that’s just so we can get the math figured out on our head and plan accordingly. I think we have a significant drop in prices until there’s a supply increase, and that’s on 2020 is still my sort of forecast for that. But until then, we’re going to have some pretty interesting prices, plus, we’re supplying this out of a variety of our facilities. We have a good mixture of greenhouse, indoor and outdoor grow, so it can meet the demand, so it’s a good mixture.
But at the end of the day, the facility we’re building in Newfoundland, half of the production coming out of there is not for Newfoundland; we’re oversizing it, because this package it’s for overseas markets. Those are medical markets, and pricing there is dramatically different. As we mentioned before, we’re primarily a medical cannabis company overseas, with a bit of recreational in Canada. This is just our first recreational asset.
James West: Okay. So does that imply that your facility in Newfoundland is GMP?
Khurram Malik: It will be. It’s under construction, yes.
James West: Interesting. So what’s the total footprint of the Newfoundland facility?
Khurram Malik: It’s 168,000 square feet, but it’s a very next-generation sort of building. Let me just put it this way: you could probably get twice as much product out of there than you typically could on your average 168,000 square foot in Canada. The way we do that is, automation. Automation like you haven’t seen in Canada to date.
So the supply shortage that’s going on in Canada right now in Canada, to blame Health Canada all you want, but the real blame should be with LPs; some of our former clients, as well. They built very rudimentary facilities where you can’t get consistent product out the door for years to come after you finish your building. And if you look at any other consumer product out there, it’s highly how they automate it. Or any other types of agriculture, right? Let’s say you grow tomatoes, or your grapes indoors…
James West: So is this shy there was such a shortage at the Ontario cannabis Store immediately following legalization on October 17th?
Khurram Malik: The first couple of days of shortage was for structural reasons; that’s going to clean up in the coming weeks. But after it cleans up and people’s inventories that they’re sitting on actually work through their retail panels, there’ll be a start and stop shortage all through 2019. And the reason for that is, you hear about a million square feet or half a million square feet; there’s no real product or consistency coming out of that square footage anytime soon. And it’s just because of the way the facilities are built. And we’re trying to address that by boiling a very different sort of cannabis facility, particularly in Newfoundland, where it’s highly automated, so when the lights turn on Day One, you know what you’re getting six months online, for example.
James West: Interesting. So what’s the extra cost involved building such a next-generation, automated system?
Khurram Malik: It’s more expensive, but you save dramatically on the OpEx, as well. So what’s interesting is, you can get the quality of an indoor facility, but the operating profile of a greenhouse – for example, if you’re targeting $1.00 a gram in a greenhouse environment, you can achieve that indoors; you have to spend a bit more upfront do it. You have to know what you’re doing, but you still save on the OpEx side of it, so it’s worth doing.
James West: Sure. A lot of the LPs have been suffering from crop failures as a result of pests, and so I’m curious as to what extend next generation automation actually mitigates against the potential of catastrophic crop failure due to pests or mildews, or other things.
Khurram Malik: You can do that a few ways. One way is, you engineer the human being out of the equation as much as possible when it comes to growing.
James West: We’re just dirty animals, aren’t we?
Khurram Malik: We are. We’re the largest variable when it comes to these systems, right? So an LP, so if they go from a 50,000 square toot building, 100,000 square foot building, what they currently do is, the double the footprint, they double the headcount. But unfortunately what happens is, the variability in your systems doesn’t go up linearly; it goes up exponentially. Suddenly the entire 100,000 square feet doesn’t work anymore, so you’ve got to learn it all over again.
So the more you can take people out of the equation, the better. Plus, having small, artisanal-sized grow rooms instead of a large sea of green rooms makes a dramatic impact in terms of quality and things going wrong.
James West: oh, really? So you’re focusing on more modularity?
Khurram Malik: absolutely.
James West: Oh, that’s interesting. That also protects you from entire crop loss, because if you get some problem in one room, it doesn’t affect the rest of the place, necessarily.
Khurram Malik: Right. And what’s interesting is, every strain that you grow has a very different secret sauce and uniqueness to it. So it’s beyond just, you know, lights and HVAC; it’s also air pressure and a few other things that have to be put into it.
And if you have several crops in a room, it just – you’re not going to grow a quality product, which is why the black market still has better quality product. It’s a dirtier product, and who knows what the providence of it is, but it’s a higher quality product in terms of percentages, also in terms of consistency, because they grow in smaller, artisanal size growers which are easier to manage.
So you can have a large building, but if you modularize it into smaller units, it’s easier to manage than – it’s a little un-intuitive, but it’s easier to manage at the end of the day instead of upfront, and you get quality. And plus, when you add machinery to it, that adds to it more.
James West: Okay. So how does that modularity affect cost per unit of production and also, ultimately, margin?
Khurram Malik: Again, we can achieve indoor quality at a greenhouse cost point.
James West: Okay, really?
Khurram Malik: It’s just, you’ve got to know how to do it, though.
James West: Okay. So I just, not to belittle the point, but you’re telling me that the sea of green, wide-open concept is exactly as cost-effective as the modular concept if it’s automated to a certain standard?
Khurram Malik: Yes. If we do our job properly, we get the same cost points at a higher quality than that sea of green. The only advantage of sea of green: dramatically cheaper to build on a CapEx basis, also your SOPs are probably about 10 percent as big as they are ours. So there are complications in the process, but if you know what you’re doing, it pays off at the end of the day.
James West: Okay. So looking at the chart here on the NDI for the last three months – so you guys started trading, what was this, back in –
Khurram Malik: About a week or two before legalization.
James West: A week or two before legalization. So you know, you have not been able to capture the, you know, the broad market in terms of, you know, real enthusiasm for your company. How are you going to turn this chart around in the quarters and months ahead?
Khurram Malik: Fair enough. I mean so it’s a bit frustrating, because we did announce this massive – we’ve announced a few small things since we’ve been public, we’re pretty newsy; I’ve got some decent coverage as well in terms of following. But we’re still a stock that nobody knows about. And if you look at the overall cannabis space, right, most of the oxygen gets sucked out by the top five or six guys. The next tier or the tier after that are just, you know, it takes a while to let the market know you exist, and what you’re doing differently, right? So when we announced something like this on Friday, our big Newfoundland agreement, it just looks bizarre for a company of our size to be announcing something so large. So it doesn’t make any sense.
So it takes a while for us to educate the public that, you know, this is really a legitimate agreement; it’s not just some fluff, we’re inventing numbers. These are government numbers sitting in this press release, not ours.
James West: Right.
Khurram Malik: So there’s that going on, plus, this is a table-setter for us. We’ve got several other large things coming before the year is out. So it’s just a matter of letting the world know we’re a bit of a different cannabis play than what you’ve seen so far.
James West: A different beast – well, that’s why I’m interested to look at the chart. I look at that and I go, well, this is either a great opportunity, or, you know, something that’s going to take a little bit longer to capture the imagination of the broader space. What are you guys doing in terms of getting the message out to the broader audience?
Khurram Malik: Well, we’ve got a pretty comprehensive sort of RRPR strategy. We use PR investment as a way to do after-market support. The problem is that we are still roughly $100 million market cap, right, and to get some people interested, you’ve got to have larger liquidity.
Now, our biggest problem is, we’ve got a small float in terms of, you know, who can trade or not. So liquidity is going up every day; that’s going to dramatically change. So when you couple that with some really large announcements coming in the next few weeks, I think it’ll pair well together, and just working against the inertia that’s in this unfavourable market right now.
So the way I sort of position ourselves right now is, you’ve got the large guys, which you can make an argument are overvalued or undervalued. What I would like to say is, the $500 million and less market cap cannabis companies right now, we are the least risky plays. If you’re looking for the next wave of things that haven’t gone on a run yet now, you can catch that wave with us with considerably less risk than pretty much any of our peers out there.
James West: Interesting. Great. So is there any ambition, then, to, you know, capture opportunities elsewhere in the world? I mean, you did mention that you’ve got ideas for exporting. Do you have actual permits or distribution in any other countries?
Khurram Malik: We’ve got some stuff percolating. So what I’ll tell you, put it this way: in the next two years, if we’re not doing the bulk of our cash flow overseas, something dramatically has gone wrong in our execution. So if we’re having this conversation, let’s say, in a couple of weeks from now, you’ll see quite a bit of our international sort of play. Again, we’re doing internationally very differently than everyone else is, and you’ll see why, shortly.
James West: Oh, okay, interesting. That’s intriguing to hear. I mean, I’m, you know, a little bit more optimistic about your guys’ chances and opportunities because you guys are investment bankers from the industry, you’ve had a ringside seat for the unfolding of this whole sector, so I’ve got to think that your guys chosen play has got to have some bells and whistles that other people haven’t already thought of.
Khurram Malik: I’ll give you a slight flavour for what it is, in case you want a bigger preview. So if you look at the larger companies that have the bandwidth to go overseas and do something, they’re focused on all the same markets: Western Europe, Brazil, Central America, maybe Australia, which are all excellent markets, by the way. But I have no ambition of being the 20th company into Germany or, I don’t know, the 7th or 8th company into Costa Rica or something like that. We’re going where other people are not, and being the first in the door. And that gives you certain rights and privileges you wouldn’t typically see, and these are countries with populations dramatically large than Canada, right?
James West: China?
Khurram Malik: Couldn’t tell you right now. Sadly, we’re public; if we were private, we could have that conversation. The point is, yeah, and that’s medical, right? And the margins in medical are pretty compelling. You’ve got to build a lot of stuff around it in terms of clinical strategies and ecosystems beyond just, you know, dropping shipments and supplying product in a country, but we’ve been working on it for quite some time, and hopefully we can share that information with you shortly.
James West: All right, Khurram, that’s great. We’ll leave it there and keep our eyes peeled, but sounds like you’re making progress. Thanks for joining us today.
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