May 31, 2019

WeedMD Inc (CVE:WMD) Converting Aylmer Site to Extraction Facility

Midas Letter
Midas Letter
WeedMD Inc (CVE:WMD) Converting Aylmer Site to Extraction Facility

WeedMD Inc (CVE:WMD) (OTCMKTS:WDDMF) (FRA:4WE) CEO Keith Merker explains the significance of the company receiving approval from Health Canada for new packaging lines. WeedMD has built a new packaging room at its Aylmer, Ontario facility, complete with two semi-automated packaging lines designed to create a significantly more efficient system. Merker believes the new system will increase both the volume of product leaving the facility and improve the company’s bottom line. WeedMD recently released its 2018 financial results, with an impressive YOY revenue increase of 465 percent. While WeedMD is in the final stages of receiving its Health Canada license to grow outdoors, the company is prepared for approval and has 25,000 clones ready for planting. Merker suggests that growing outdoors is a truly disruptive advantage in the Canadian cannabis space and suggests the bulk of the outdoor product WeedMD will grow will be used for extraction. Merker shares details of the company’s three-stage conversion of its Aylmer facility from an indoor grow space to a premier extraction processing hub using supercritical CO2.


James West:   I’m joined now by Keith Merker, CEO of WeedMD Inc., trading on the TSX Venture under the symbol WMD. Keith, welcome back.

Keith Merker: Always good to be here.

[stock_chart symbol=”WMD:TSV” align=”left” range=”1M”]

James West:   You have been knocking it out of the park lately; I have been sampling some WeedMD product, and I’m happy to say that there is good cannabis available now in Canada thanks to WeedMD.

Keith Merker: [laughter]

James West:   You’ve just secured Health Canada approval for new packaging lines. What is the significance of that to investors in WeedMD?

Keith Merker: So one of the biggest bottlenecks that this industry as a whole, and WeedMD also as one of the companies that makes up that whole, has experienced, has been the bottleneck of getting all your finished product into these packages and out the door and off onto the shelves at, in many instances, the provincial agencies and then the retailers themselves. And WeedMD took an approach that we would make the right decisions, and those decisions, of course, took a little bit more time than rushing into something late last year when we were kind of – our backs were against the wall to some degree, because we didn’t have all the – the light wasn’t shed on all the regulatory requirements and the packaging and labeling requirements that would be put into place prior to the rollout of the new recreational market.

So we took a bit of a slow and low approach, and we’ve been packaging, by and large, quite manually thus far. So we built out a new room at the Aylmer at our flagship facility in Aylmer, Ontario, and in that room, we now have two semi-automated packaging lines that are currently being calibrated. Before getting this license, we were actually working with these machines, believe it or not, with popcorn, running popcorn through the machines to calibrate them to some degree and to make sure that everything would operate smoothly, filling containers, 3.5 grams worth of popcorn.

James West:   Wow.

Keith Merker: And now, thankfully, as of today, we are able to fill those packages with cannabis, finally. And so we calibrate these machines, get everything ironed out, and then starting Q3, starting a month from now, we’ll be able to roll out, you know, a much more fulsome program with respect to our systems around packaging. And that’ll allow us to get a lot more product to market a lot more quicker and efficiently, and of course, that’ll have a drastic impact on our margins, as well.

James West:   Sure. So that is the underlying logic, is to get more product to market faster, more efficiently?

Keith Merker: Yeah.

James West:   And so how will that affect your bottom line?

Keith Merker: Well, that’s just it. I mean, as you can imagine, right now, we’ve got rooms full of people with scales literally filling packages one by one. You know, there’s portions of it that are sped up and somewhat automated, but that being said, that’s really what you would see if you walked in there today.

This is a completely different beast; these two, very large multi-head weigh scale machines and conveyor belts and so on and so forth will be pumping out product at a much, much higher rate, with much less human involvement, and what that ultimately means is that much more money is going to fall to the bottom line for WeedMD and its shareholders.

James West:   Cool. Will that give you a higher volumes of shelf space across the country?

Keith Merker: Absolutely. It’ll allow us – see, we’re now in a quarter here in Q2 where, you know, initially – I’ll roll back the tape. Our Strathroy site, which is our primary growing site right now, we had one acre of that which included two very large, 10,000 square foot flowering rooms licensed last June, so almost a year ago. And those rooms have been producing ever since, but it wasn’t until Christmas Eve, actually, when we got the license amendment for another six rooms, another 60,000 square feet, to come online. And so –

James West:   Christmas Eve?

Keith Merker: Christmas Eve.

James West:   That’s a nice little gift.

Keith Merker: Thank you, Santa Claus, Health Canada.

James West:   [laughter] Great.

Keith Merker: So we planted those rooms throughout January, and it’s now that we’ve been harvesting those here in Q2. And it’s in this quarter that we can start to get that product out to market. So in other words, our production rates have drastically increased, and getting that product to market, it’s sort of now in Q2 and into Q3 as we really start to ramp up. And so it’s required for us, obviously, to have the capabilities to package all of this gear and get it to market efficiently.

James West:   You bet. So how many strains, and how many different products, now are available across the country in Canada that are produced by WeedMD?

Keith Merker: Yeah, so we’re running with about eight strains right now. Some of the availability will wax and wane a little bit as we, again, iron out all of our cultivation scheduling, because again, you know, again, those six rooms, for instance, came online Christmas Eve, and we’ve had now one full harvest and we’re on to the next in those rooms. And so it’ll fill out our inventory and ability to deliver.

We’ve got some great strains, and the reception that we’ve received and the reviews that we’ve received have been tremendous. Our Pedro Sweet Sativa, formerly known as Wine Gums, is a headline strain for us; I kid you not, and I want you to come out for a visit, when we have one of these 10,000 square foot rooms filled with 3,600 plants, this sweet sativa strain stretching up to the lights, literally with colas, apex colas, I mean, literally the size of my arm…and the terpenes are incredible. You walk in the room and it’s like just getting smacked in the face with wine gum.

James West:   Really? I love wine gums.

Keith Merker: It’s sweet and it’s beautiful.

James West:   Awesome.

Keith Merker: Yeah.

James West:   That’s amazing. Okay, so your 2018 financial results also were published recently: $8.2 million in second year of operations, that’s pretty substantial, pretty amazing. And year-over-year increase of 465 percent. That kind of like double-digit Q-on-Q growth is spectacular, double-digit year-on-year growth is fantastic. Triple digit year-on-year growth is extraordinary. Is that a pace that you can possibly maintain into next year and the year after, do you think, with this increased packaging ability, with this increased landscape?

Keith Merker: Yeah, so I was watching the Raptors game on Saturday night, as I’m sure you probably were, and after the game, when they were talking with a couple of the players, they were talking about, you know, this is great, but it’s not good enough. Here we are, this is wonderful, but it’s not good enough. So WeedMD is very much the same. We’re doing great, but it’s not great enough, yet. As I said, we’ve got all those new rooms online, we’ve got a tremendous amount of production coming online across the rest of this year, including the most compelling outdoor cultivation story in operation in the business.

So I guess what I’m saying is, wait and see, because 8.2 for the last year was great. Our first quarter’s going to be coming out later this week, of 2019. You know, we’re still, we’re heading in the right direction, but things are really going to start to ramp for us later on this year, and that’s when we can sit down and talk and I can tell you that we’ve hit the mark.

James West:   Okay. Actually, you reminded me that you’re actually about to start growing outdoors; you’ll be one of the first LPs who has actually got significant outdoor production. Tell me about your outdoor production profile and what is it that you’re growing outside, what will that become in terms of the final product?

Keith Merker: Yeah, so you know, just to give you the story here, first and foremost, I should point out we don’t yet have the license amendment from Health Canada. So we are anticipating getting that in time to get some plants in the ground. So that is the one piece of the puzzle that’s left outstanding.

However, we have put together, as I mentioned, the most compelling argument for a successful outdoor grow in the industry, and reasons being, A) we made sure that we’ve got municipal support, to the point where the mayor was actually quoted on our press release about our outdoor grow. We’re very engaged with the regulator right now, and feel like we’re in the final strokes.

We put up a 27 acre perimeter fence in record time, with full security protocols and cameras and everything onsite, prepared and ready to go. That 27 acres is organically certified soil. But critically, it’s on the same property that we’re already licensed on. So our greenhouse in Strathroy that’s currently producing all of our product is right next door to this field where we’re growing outdoors.

So in other words, we’ve already cut 25,000 clones that are sitting in that greenhouse, waiting for the outdoor. So we’re prepared, as prepared as anyone’s going to be. The strains, to your initial point, that we have cut and have prepared, are a number of our strains, some of which I’ve already mentioned are flagship strains. So our growers, we’ve got the critical team on the cultivation side that’s got the been there, done that factor, that box ticked when it comes to the outdoor – both from the expertise standpoint, but also from the genetics standpoint.

So the genetics that we are planning to grow outside, including Pedro’s Sweet Sativa, or the Wine Gum strain, which I’ve seen pictures of growing outdoors in Ontario, in November, because it didn’t get cut down earlier, with snow on it.

James West:   Really?

Keith Merker: And this strain came down and blew everyone’s mind. So there could be a market for Canadian ice cannabis at some point, is where we’re going with this.

James West:   Oooh, ice cannabis! That just has a sexiness to it that, like, oh my gosh. Ice cannabis wine gum. Like, ice wine gums; like, don’t even get me started.

Keith Merker: I won’t.

James West:   Okay, so before we get too much more distracted [laughter] the economics of growing outdoors: is that something that’s going to really add to the bottom line in terms of margin?

Keith Merker: Oh, absolutely. It is truly a potentially disruptive growing methodology vis-à-vis indoor or even the greenhouse. Now, they’re all different products, mind you, so there is a place, in my view, for all of them. However, when we look at the outdoor environment, we’re growing for an order of magnitude cheaper than we are, even in the greenhouse.

James West:   Right. And so would this be for extracted product, ultimately, or is there such a thing as homegrown premium dried flower in that environment?

Keith Merker: Yeah, no, from everything I’m hearing from our cultivation team, there will be a market for the premium outdoor grown flower. The bulk of the product, we are anticipating, in our internal forecasts, will be destined for extraction, but if we can go through the – I guess the harvest methodology is such that we’ll go through and take the apex colas off, and treat those differently than the rest of the plant.

James West:   Well, that would be organic sun-dried cannabis? I would see that having a huge premium.

Keith Merker: There’s a market, and you know, it’ll be interesting, because every strain, every year, in every area where it’s grown, every field where it’s grown, will be different. So you’ll get this more of a terroir, more of a vintages kind of fine wine aspect to this cannabis.

James West:   Wow, that excites me. You’ll have to do wine tours. So Keith, you’ve also announced that you’ve expanded your extraction capabilities in Aylmer. Give me a bit of an overview of what’s developed there.

Keith Merker: Yeah, so the whole concept stems from the fact that we’re running two facilities quite close to each other. Both wonderful facilities in their own rights: we have Aylmer, which is the flagship site, 26,000 square foot indoor facility growing cannabis, all the licenses you could ever want under the Cannabis Act, inclusive of, obviously, production and sale of oil, which we’ve been doing successfully now since 2017.

And Strathroy, which is the new, shiny object in the WeedMD arsenal, which is this massive opportunity on the grow side, which has been proven out to be terribly successful so far in the greenhouse; with the massive outdoor opportunity tacked on, it’s just a wonderful gem of a crown jewel in the organization.

When you look at those together as a holistic company, you have to sort of analyze the numbers and analyze the opportunities and say, well, here we are in Aylmer: we’re growing about 1,200 kilograms per year of, mind you, very high quality, very sought-after cannabis. But in the context of what we’re able to grow and what we’re currently growing in Strathroy, which is 10X currently and going up from there, having a higher cost indoor grow doesn’t make sense.

So you start to think about what’s the highest and best use of that license and that facility, which we wholly own, and it’s expandable; it’s on four acres of land as well, in a very welcoming municipality that’s been very friendly to us and very helpful to us as a company. And so it only made sense for us to look at that and say, okay, if we were to start over, what would it be? And it became obvious that that becoming a solely devoted extraction and processing facility was the right answer.

And so to that end, we’ve now removed cultivation from the Aylmer site, and we are installing in three different phases what will be a premier Canadian extraction processing hub in Aylmer, Ontario.

James West:   And what kind of extraction are you going to do there?

Keith Merker: So historically we’ve been running ethanol extraction, however, going forward, as we scale, we have actually decided to go to a critical, supercritical CO2 extraction technology. Not to say that we won’t have other methodologies under our umbrella going forward, but initially, in Phase I, it will be some very large scale C02 extraction, with the full ability to get to distillate as well through short-path distillation.

James West:   Okay, so supercritical CO2 is really sort of the Holy Grail in terms of extraction, because you can extract using CO2 and not volatile compounds that might have some residue left in the final product, which everybody – or the purists don’t like, we’ll say. What kind of gear are you anticipating using? Like, there’s such a wide variety of equipment out there, with price points to match, I mean, and it’s really incredible. How do you figure out which gear you want to use? What are your criteria?

Keith Merker: Yeah. We did a broad, broad scoped R&D project, or research project, I should say, across the spectrum of CO2 equipment suppliers, and very in-depth, analyzed all the different opportunities, the pros, the cons, the goods, the bads, the uglies, and landed on, for Phase I, a group here, homegrown Canadian boys from Kelowna out, a company called Vitalis, which I’m sure you’ve heard of.

James West:   Oh, yeah, for sure.

Keith Merker: Wonderful team, they’ve been immensely helpful in making sure that we are able to hit our timelines, helpful coming through the facility and helping us organize and draw out the layout and the scheme and the plan, and just a great group of people to work with.

James West:   Yeah, right on. Okay, well, we’ll leave it there for now. We’ll keep an eye out for this new extracted product, which will be available in the Ontario Cannabis Store and elsewhere across the country, I’m assuming?

Keith Merker: You bet.

James West:   Okay, great, Keith. Thanks for joining me again. We’ll come back to you soon.

Keith Merker: Awesome. Thank you.

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