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Biome Grow Inc (CNSX:BIO) Deal for Lowest Cost CBD Concentrate in the World

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Biome Grow Inc (CNSX:BIO) (OTCMKTS:BIOIF) (FRA:6OTA) CEO Khurram Malik discusses the company’s recent deal  to acquire up to 20,000 kilograms annually of high-quality CBD concentrate from CBD Acres. Malik highlights this deal provides Biome with the lowest cost CBD concentrate in the world because the product is hemp-based. The cost is also lower because CBD Acres uses proprietary strains with 15 to 20 percent CBD concentration instead of conventional strains with only 2 to 3 percent concentration. Malik believes the 20,000 kilograms of CBD concentrate represents over $250 million of potential revenue for Biome without having to build a large and expensive cultivation facility. Biome approaches international expansion differently than most cannabis companies. Malik explains that Biome’s preference is to enter new markets first and help create regulation to usher new jurisdictions from medical to recreational legalization.

Transcript:

Narrator: Biome Grow Incorporated is a Canadian-based cannabis company with national and international business interests. Biome owns five subsidiaries, including the Back Home Medical Cannabis Corporation in Newfoundland and Labrador, Great Lakes Cannabis in Ontario, Highland Grow Inc. in Nova Scotia, Red Sands Craft Cannabis Company in Prince Edward Island, and Weed Virtual Retail Inc., a company in Ontario which operates a new virtual reality technology platform focused on the medical and recreational cannabis markets.

Biome Grow Incorporated in headquartered in Toronto and trades on the Canadian Securities Exchange under the ticker symbol BIO.

Benjamin A. Smith: All right. Joining us in studio we have Khurram Malik from Biome Grow. Welcome to the program, Khurram.

Khurram Malik: Thank you, good to be here.

Benjamin A. Smith: Great. So getting right into it, let’s start with your newest press release: you recently announced a Memorandum of Understanding to access high quality and low-cost supply of CBD concentrate from CBD Acres Manufacturer, Inc.

Khurram Malik: Yes.

Benjamin A. Smith: Can you tell us a little bit more about that press release and how that, you know, affects your operations going forward?

Khurram Malik: Sure. It really speaks for our ethos that we’re a relatively new company, and we didn’t want to build millions of square feet of production space to generate a simple level of cash flow. We could do it by sitting in the middle, get large offtake contracts like other people grow first, and CBD gone right is really the next big thing. If you look at most of the jurisdictions in the world, there’ll be more CBD-based products sold than THC-based products sold.

And through CBD Acres, which is a related party to Biome, we’ve got a way of growing the lowest cost CBD in the world using technology, know-how and pedigree, and that’s an enormous volume of product.

Benjamin A. Smith: Okay. When you say the lowest cost in the world, would that include even places like Latin America and Colombia where, you know, some of the, they’re going to be producing, you know, $0.10 a gram, perhaps extracts from grams that are as low as $0.05 or $0.10 a gram?

Khurram Malik: Yes, and the reason is, hemp is not regulated by the Cannabis Act like us, Biome, on our side, is with marijuana. Plus you bring in some very proprietary strains which have 15 and 20 percent CBD concentration instead of 2 or 3 percent, which most people work with, and then some very propriety extract processing methodology is involved, which are proprietary to CBD Acres, you get some very interesting price points. You can’t do that with marijuana, but you can do that with hemp if you know what you’re doing, in Canada.

Benjamin A. Smith: Wow. Okay. So I take it you don’t believe that CBD is, you know, as a wellness product, is a fad? You do see a huge market going forward?

Khurram Malik: Yes. I think we look at it is, if you look at where the MMPR program was five or six years ago when the regs were just getting started and there’s one or two licenses and the first 12 or 15 original came online, that’s where CBD is today and over the next, say, 12 months.

So through CBD Acres, it’s in our opinion the largest industrial supplier of CBD in the next 24 months in Canada, and at very attractive price points. We just have the economics that work for us. And you know, when I say 20,000 kilograms of concentrate, that’s over 200,000 kilograms of dried flower that has to go to make that concentrate. That’s over $250 million of potential revenue for us, that we don’t have to spend to build a facility to get that product out the door.

Benjamin A. Smith: So you have a supplier agreements with suppliers to provide that dried cannabis flower?

Khurram Malik: Right. So the revenue sort of states, okay, this is how much we’re going to approximately need, so they can plan accordingly. Others can go and buy from them as well; they’re not exclusive to us. And now what you’re going to see next from us is, we’re going match POs around the world. So it’s mostly for international sales, and we do international differently than most licensed producers do. We like to go in first, help write the regs in some cases, help influence them. The way we influence them is, start with CBD for medical purposes and nutraceutical purposes. Maybe THC-based meds down the line, and then maybe recreational, you know, way down the line if it happens.

You know, it’s an easier sell than going all-on medical from Day One. And these are, you know, jurisdictions with a lot more than 36 million people we have here in Canada.

Benjamin A. Smith: Terrific.

Khurram Malik: So we need a lot of product.

Benjamin A. Smith: So, how do you see the market here in Canada shaping up? Do you see perhaps the market expanding a little bit quicker now, or picking up, now that adult use market has been three months old, or four months old now?

Khurram Malik: Yeah, I think so. I mean, there’s two parts to that: one is to get a bit more production out the door, and we’ve got to get through some of these structural constraints, which are causing supply shortages for some jurisdictions; some people get product, will get product.

So that’s the problem, right? So it’s that, plus you have to have a better quality product out the door as well.

Part of the challenge you’re going to see is, the government may have to step in and sort of limit exports or products outside of Canada, because while the supply shortage is here, because the recreational market margins for these LPs, including us, are lower here than our medical margins overseas.

Benjamin A. Smith: So there’s incentive to –

Khurram Malik: Yeah. Yeah. So I’m still forecasting, and my forecast hasn’t changed in two years, this whole forecast the sector: supply and demand will not normalize until Q1 of next year at the earliest. So until then, you’re still going to have these issues where there’s not enough supply in the market, and that dramatically lowers the amount of, you know, market uptake it can have here in Canada.

Benjamin A. Smith: That’s a huge runway here for opportunity. You’re looking at, just, you know, another year, and then of course the uptake after that year. So you’re looking at least 24 months of runway, I would assume.

Khurram Malik: I think so, yeah. So it’s not a situation where you’ll be flooded with product anytime soon and LPs going bankrupt because prices are crashing; that’s a ways down the line. But again, for us, we’re going to be a small to medium-sized player in Canada; we use it as a beachhead, but we use it as a leverage to go into overseas markets. That’s where the prize for us is, but we’ve got to have a level of credibility in our own market to do that.

So that’s why we’re doing a few things here.

Benjamin A. Smith: Okay. Do you envision exporting that technology to Latin America at some point? Or do you not really see the need, since your production costs are going to be so low anyway?

Khurram Malik: I think what it’s going to be, I think we’ll be, our production costs on CBD side will be pretty low, but for our THC production, yeah, that will be overseas, because again, the regs here for THC are expensive to do anything in, right? On the hemp side, not so much, so the hemp guys do whatever they want to do, and only when you try to extract the flower into some sort of derivative product or concentrate, that’s when the Cannabis Act kicks in.

So the entire upstream part is a very low cost jurisdiction actually to operate in. You only get one grow here a year in Ontario where we are, 4,500 acres, and in Latin America or Central America you may get multiple grows. But that’s the only downside. But we can get quite a bit of juice out of that grow.

Benjamin A. Smith: Okay. Would you consider Biome Grow an influencer in terms of Canadian government market regulations? Are you speaking with government officials regularly to try to influence policy, or are you –

Khurram Malik: We are, we were involved a little more in terms of the government influence sort of early on. We were investment bankers and consultants in the sector, and we got involved early; a little less now, and most of our focus is on regs overseas in other countries. We’re literally going to countries and convincing governments to actually even start a program from scratch, that’s where most of our time has been.

I think we were influencer for the industry here, because the way Biome Grow is set up is, we go and see, okay, right: we start with a blank slate: how can we build a more efficient cannabis company? And then we find problems in the sector and we try to address them through the Biome Grow platform, which is why we’re doing a bunch of different things and they may not seem to fit together today, but they will tomorrow. And you know, whether it’s border governance, management teams, how you grow, how you don’t grow, how you actually build a de-risked cannabis platform where you get contracts first and then you build a facility and meet the contracts instead of building a million square feet and then keep your fingers crossed there’s a customer for it today and a customer for it tomorrow.

Some people can do that. I just don’t think it’s a very intelligent way to do that when you, you know, you’re not the first five or six out the door.

Benjamin A. Smith: That sounds like a tough way to model, financially model, you know, how some of these divisions could be profitable when you’re trying to solve problems.

Khurram Malik: It is, but we’ve been neck-deep in this thing since the beginning of the sector, right? So we know what the problems are. Some are very nuanced problems that a typical investor may not see, or an LP may not concede to the broader market out there.

Benjamin A. Smith: Yeah.

Khurram Malik: But it’s causing problems on production, it’s causing problems on profitability, it’s causing problems on distribution, right? So we’re trying to address those as best we can domestically, but yeah, overseas just have, there are better regs overseas. They look at what Canada does and they improve on them. So that’s sort of the Catch-22 of going first as a Federal jurisdiction: others have phase 2 of it and it takes longer for us to sort of move on and sort of refine them.

Benjamin A. Smith: Okay. Last question: when do you expect net profitability for Biome Grow, and/or EBITDA profitability in the window?

Khurram Malik: Yeah, so again, we went public a little while ago, we got our sales license and our first facility in December of last year. We’re operating cash flow positive today. If you strip out all the expansion capital spending to get our other facilities up and running and our international assets, so purely based on operating assets, we don’t need money to keep the lights on or pay salaries, which is, I think, pretty rare how quickly we got there.

Benjamin A. Smith: Yeah. So you have no, you’re not growing in greenhouse, correct? You’re –

Khurram Malik: We’re not a fan of greenhouses unless it’s a building with a glass roof, which is a very, you know, Luddite greenhouse sort of experience. It speaks to the quality. I mean, you can see all the greenhouse product on the market today: every single greenhouse product is substandard. Every single one.

Benjamin A. Smith: That’s a pretty big claim. Would you say substandard, everyone? Would you go so far?

Khurram Malik: So the way I compare it is, is it better than the artisanal grow that you get out of the black market, where you’ve got these small little grow rooms? A few people are better at it than others; I think Supreme does a good job, because they have smaller rooms. The see or green approach is what I’m talking about, where you’ve got this one massive room with about thousands of square feet of production space. I haven’t seen anyone producing a good product there. The black market has a higher product.

If you look at our facility, we have indoor facilities with really small, artisanal-sized grow rooms, and in Nova Scotia, we’re as currently NSLC feedback, it’s the highest rated product in that province. Just because we grow indoors and we grow in a very careful, cultured sort of way, and not to say that’s not so great when you have a large-scale, but we’re not there yet, right? So we have smaller facilities, so I can sort of sit up here and say, yeah, it’s a better way of doing it. But if I had, like, half a million square feet under, you know, under canopy, doing it in our small rooms would be difficult. I’m not building a half million square feet, I’ll let other people grow for me. I’d rather be the one who gets the contracts in the middle, build the brands, and prices are going to come down.

So where I can avoid being a farmer, I’d rather avoid being a farmer.

Benjamin A. Smith: Exactly. And that’s a quote we’ve heard before from several CEOs.

Khurram Malik: Let others figure that out.

Benjamin A. Smith: And lastly, I think you touched a little bit up on this, but what can investors, what do they have to look forward to in the next, say, two, three quarters ending 2019?

Khurram Malik: So we’ve only announced so far as what we’re doing domestically as a table-setter for the overseas. So the announcement today is really our first real cog as it relates to what we’re going to do overseas; this is where a lot of the supply for overseas markets is going to come from, made in Canada product.

Stage 2 will be a few more infrastructure assets, clinics both here and in other jurisdictions, and Stage 3 after that will be actual POs with some very large jurisdictions. We have some interesting bells and whistles around that, which you’ll see, which I think we disrupted the sector and pretty large volumes.

I mean, we’ve announced the fourth-largest offtake contract in Newfoundland to date. We’ve announced the largest CBD supply contract in history, which is what this is if you actually run the numbers. So, for a tiny little company, we’re doing some pretty big things, and now it’s just a lining up some of the international contracts which will be even bigger than what we did in Newfoundland. So it just a matter of letting people know we exist. Some of them sound a little too good to be true, which I get, people should be skeptical; but these are scored, clean and graded contracts.

Benjamin A. Smith: Actually, you know what? I’m going to throw an addendum question to you, because since we’re having such a great conversation, you view some of the brands, and I believe your company has five subsidiaries, right? And there’s some brands involved there. Would you say that, internationally, do you see the potential for Canadian brands to be worth a premium versus other nations as they come online, since we’re the first G20 nation to legalize?

Khurram Malik: Yeah, I think so. I think we’ve got this narrow window of opportunity right now. We have to capitalize on that. I think at some point, if we don’t do that, others, like Western Europe, will eat our lunch. And it’s parts of South America. But there are also certain jurisdictions in the world which are coming on with medical programs now, that just like anything made in Canada, which – look at Asia for example, right? Certain parts of Asia, not all of Asia. They love anything made in Canada. So when I look at certain Asian jurisdictions, I would much rather grow THC over there, based in marijuana, but they want a made in Canada product, which is frustrating for me, which is why our facility in Newfoundland is going to be bigger than what we need for Newfoundland.

But yeah, there’s that, again, narrow window of opportunity. We’re taking advantage of it; we’re going in with a made in Canada expertise to these jurisdictions and convincing governments yeah, we’ve got a know-how and the expertise; let us help you design a medical program. That goes even beyond just a consumer product. So it is there, and hopefully all our competitors capitalize on it, because it’s not going to be there forever.

Benjamin A. Smith: Terrific. Well, thanks for being on the program again; that was, you know, a great re-introduction to your company. We hope to see you soon.

Khurram Malik: It’s dramatically changing every couple of months.

 

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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