Part 1 of 2 – AREV 37 Cents: MCap $19M – Comparables Valued $350M to $550M

cannabis stocks

AREV Brands (AREV:CSE 37 cents) / BC Bud Depot (BCBD – AREV Division) – www.arevbrands.com – Market Cap $19M

First – An Important Reference for Valuation Purposes: Medipharm and Cannabis Extraction Specialists

Medipharm (LABS:TSXV $5.46) is one of only a handful of public companies focused on Cannabis plant extraction (primarily private label to growers like Canopy Growth). AREV and BCBD (an AREV division) are extraction specialists but they are also leaders in the field of Cannabis genetics and have three decades of grower experience.

LABS has managed to achieve a market cap of $535 Million with only $14 million in Cash and $16 million in buildings and equipment. This is offset by $16 Million in Debt. That means investors (right or wrong) value LABS future earnings potential at $520 Million!

Medipharm went public October 2018 with a market cap near $200 Million – and they did this “without” a Health Canada license to process.Early November they received that license and subsequently  reported $10 Million in revenue for Q4. Gross profit was $4 Million (39%) with adjusted earnings of $2 million. Solid numbers, but it is hard to imagine they have a market cap of $1/2 Billion.

Two weeks ago, the Financial Post published a story that focused on extraction. It is very important to my coverage of AREV because of their expertise in this area. Investors have been primarily focused on the big growers, but their valuations are irrationally high, and people should now be looking for high growth diversification in this sector. I personally believe that can be achieved with AREV. But before I get into the relevance to AREV and BC Bud Depot (BCBD), note these comments from the Financial Post:

Financial Post 04/12/19: Why business is booming for cannabis extraction companies, despite the supply shortages

Although licensed producers are getting into extraction, observers predict it won’t be enough to meet future demand for cannabis in oil-form

In the most recent round of cannabis earnings, a little-known company called Medipharm Labs Corp. posted revenue of $10.2 million for the quarter ending Dec. 31, 2018, a figure that placed it comfortably amongst the Top 10 for Canadian cannabis companies.

For a company that does not grow cannabis, Medipharm’s financial performance caught the attention of investors: Within days, its stock soared 30 per cent, and has since maintained that upward trajectory.

Instead of growing, Ontario-based Medipharm is one of just a handful in Canada involved primarily in the business of extracting oils from the marijuana plant and turning them into products like gel capsules, or the high-potency concentrates that are expected to become legal later this year.

Although some of the biggest licensed producers such as Canopy Growth Corp., Tilray Inc. and Aurora Cannabis Inc. are either constructing or have constructed their own extraction facilities, industry observers predict that infrastructure simply won’t suffice to meet future demand for cannabis in oil-form.

As such, they predict, companies focusing solely on cannabis extraction will start comprising an increasingly important subsection of the overall industry.

“Cannabis extraction is a huge growth opportunity in Canada. The reason I say that, is because if you look to the U.S., it was not uncommon to see 75 per cent of the market consuming cannabis flower years ago but as product offerings became more differentiated, we saw the market for flower drop to around 40 per cent, and the market for oils surge to over 60 per cent,”

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AREV owns high capacity extraction equipment and has extensive knowledge in producing bulk extracts, terpenes and distillate from Cannabis. Mike Withrow, the CEO of AREV owns a private company called Alternative Extracts Inc (AEI) that specializes in extraction from a large variety of plants. AREV has the exclusive on Cannabis extraction systems from AEI

AREV extraction systems have been designed for large capacity production and are ready to plug in on a licensed site and process cannabis plant biomass into extracts to be used in formulations or as packaged products for distribution.

To anyone outside the company it would not have been recognized but April 24th AREV announced a “major advancement in extraction scalability and throughput”. They noted the following in a press- release but it was low key as they need to protect the Intellectual Property (IP) aspect of this.

AREV Brands International Ltd. has modified its subcritical Fast Freeze Extraction (FFE) systems to be fully scalable to handle tonnes of biomass on a continuous basis and has developed a patentable method that increases the ability to separate waxes from biomass on the fly.”

From what I understand, “the ability to separate waxes from biomass on the fly”, is a big deal. It can dramatically improve the economics of processing / extraction. And the fact they can handle tonnes of biomass (Cannabis plant material) quickly, is very important as this is one of the main features of Medipharm.

It is important to note from the information above that Medipharm went public with a value near $200 Million before they even had their Health Canada license to process (a similar situation to AREV). But the huge difference here is, AREV has a market cap of only $19 Million. They not only have industry leading extraction expertise, but so much else going for them – that is unrecognized by investors (outside of ourselves and a small group close to AREV).

As the Financial Post article mentioned, the consumption of dried cannabis flower (smoking it) dropped dramatically in the United States as alternatives were introduced to the market – this only makes sense. And this is exactly what we are going to see happen in Canada this winter – and elsewhere as Cannabis becomes legal.

In addition to oils and edibles, I have witnessed small vaporizer pens that are highly effective after one or two hits, have NO smell, and come in many flavors. Here is an example of what AREV / BCBD will be able to offer – this is ONLY possible through cutting edge extraction expertise.

Only a tiny percentage of the population likes the smell of Cannabis, so products with NO smell (and appealing flavors) will be hugely popular in legal markets. But as noted, this is ONLY possible from extraction experts.

NOW ADD FUEL TO THE FIRE – GENETICS

The founder of BC Bud Depot (BCBD), Matthew Harvey, for the past thirty years has collected Cannabis seeds from around the world and now controls one of the largest seed banks anywhere – an incredible variety of genetics / strains. His brother, Timothy Harvey, is founder and CEO of Lighthouse Genomics (https://lighthousegenomics.com/) – specialists in Cannabis genetics, Genome sequencing, and Bioinformatics.

The two brothers are literal pioneers in the Cannabis industry and combined, bring an amazing amount of talent and expertise to this industry – and to AREV, who is working closely with Lighthouse.

Matthew has already produced some of the most award-winning strains in the Cannabis world, but this is only the tip of the iceberg going forward. They are using Lighthouse science combined with their giant seed bank to identify what makes these strains better than others. You could likely build a company around these four BCBD strains alone – but strains will emerge in the years ahead from AREV (BCBD) that will also be world-class.

Proof of the expertise that exists within AREV. As far back as 2004, Matthew won the Indica Cup (with BC God Bud) at the High Times Cannabis Cup – this is the leading International event for Cannabis growers. He did this in a grey market when Cannabis science consisted of someone working in their garage – it is nothing like they have access to now.

Excerpt from AREV News Release April 11, 2019

Lighthouse has conducted Whole Genome Sequencing on a population of ten BC Bud Depot cultivars, obtaining data from the entire DNA sequence – roughly 800 million base pairs per individual plant – at 15 times coverage, a level of accuracy unprecedented in the cannabis industry worldwide. Lighthouse’s work with the high-quality data from BC Bud Depot genetics allowed for a significant advancement in cannabis science, with over 25 Million variable locations detected in the genomes sequenced, as compared to approximately 450,000 reported in published studies, a 55-fold increase in the number of high-interest data points. The project team consisting of two PhD geneticists and seasoned cannabis breeders is led by Lighthouse Chief Science Officer Dr. Gina Conte.

“Until recently, genetic data at this level of accuracy was available only in the field of human genomics,” stated Dr. Conte, who designed Lighthouse’s proprietary analytic software. “We are able to detect the degree of genetic novelty, or ‘uniqueness,’ of individual genes of interest, and of the plant genome as a whole,” she added.

“Our project with AREV and BC Bud Depot uses cutting-edge science to accelerate the development of rare and unique genetic assets with valuable, targeted qualities,” stated Timothy Harvey, Lighthouse CEO. “We can rapidly detect those distinct cultivars with uncommon characteristics that stand apart from the cluster of genetically similar strains currently flooding the market. Identifying desirable genetic differentiators allows us to breed for innovation, targeted user experience and specific areas of benefit in health and medicine.”

From Lighthouse Genomics:

Names don’t identify the plant — you can have different strains that show the same chemical profile. There is a weakness in the supply chain where there is no mechanism to verify the genetic consistency of a batch of cannabis being moved onto the shelves.” Imagine distillers noting the alcohol content but not distinguishing between rum and rye.

The lead geneticist at Lighthouse, Gina Conte, said it is a massive problem: “The strain names are not meaningful. You cannot actually be sure you are getting what you think you are getting if you just go by the strain name.” A 2015 study found only a moderate chance that any of 81 strains of marijuana were what they claimed to be and “names often do not reflect a meaningful genetic identity.”

The cannabis genome was sequenced in 2010, but the primary source of breeding material for the legalized economy was the underground industry, which was rife with misinformation, interbreeding and ignorance — guerrilla gardeners sometimes wrongly identified their plants or appropriated incorrect names for their cachet.

Smaller producers have a big stake in seeing a genetic labeling regulatory system because it will help them distinguish a premium product, protect specifically bred plants and allow consumers to know exactly what they are buying.

AREV will combine superior genetics and certification with world-class extraction expertise (like the vaping flavors noted above)… and their new ability to process plant material in large volume (high throughput economics)

Next, Add…. HIGH YIELD Cannabis Genetics

The image above shows the industry norm for the Cannabis industry.

There are very few crops that can compete with Cannabis on a revenue per acre basis. But there is also a huge difference in earnings or cash-flow per acre because plants grown indoors typically come with huge capital and operating costs (which I discuss further below).

If a grower can increase the pounds of flower per plant (per acre) – the yield – they can significantly increase their overall profitability.

AREV is making dramatic progress in this field and hopes to become a leader in producing high-yielding Cannabis or Hemp plants.

Case in Point – The Marijuana plant shown above (grown using BCBD genetics and guidance) had the benefit of natural sun and a lot of water BUT it also used superior genetics associated with BCBD.

I estimate this plant is about 10 feet tall and approx. 10 feet wide. When I was shown this photo (I am the one that blurred out images of the people), I thought this was 3 or 4 plants clustered together – it was not. You can imagine the positive economics of such high yielding plants.

Not only would it yield significantly more pounds of dried flower, but once extracted (refined) into other consumer products like edibles, vaping cartridges, etc., the cash-flow potential is significantly higher than dried flower.

AREV doesn’t want to be the farmer / grower (at least not on a large scale – and preferably outdoors), but their intent is to have people growing their specific genetics – under contract or in partnership (which we could first see in California).

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Matthew Harvey, lead breeder for BC Bud Depot states, “Our mandate is to improve the quality of cannabis available to both medicinal and recreational consumers in Canada and abroad. We have the privilege of drawing upon a vault of seeds containing popular strains long thought to be lost to the world. This will ensure an improvement and expansion of the available cannabis gene pool.

Mike Withrow, CEO for AREV Brands International states, “The ownership of BC Bud Depot’s vast genetic reservoir of historic strains allows us to apply new breeding techniques to creating the next generation of cannabis strains, with a broad appeal to consumers and industry. Our breeding programs will ensure that BC Bud Depot genetics continue to set the bar for quality in the industry, and we will select our cultivation partners based on their ability to bring out the very best in these strains.”

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The giant fully integrated growers with economies of scale will do well – but are their current valuations justified at Billions of dollars ?  Not likely – at least not for a few years until they prove they can make the money that warrants these incredibly high valuations. Buying them at this stage, seems extremely risky.

However, buying companies like AREV that have a very promising business model built around high margin cash-flow, and with a low valuation ($19 Million CDN) because they have been ignored by investors, seems to make more sense – at least from my perspective.

Medipharm and their two main competitors are very good companies, but their valuations are also extremely high.

  • Medipharm (VGW:CSE) – Market Cap $555 Million ($14M Cash / $15M Debt / $16M Bldg.)
  • Valens Groworks (VGW:CSE) – Market Cap $350 Million ($28M Cash / $1M Debt / $7M Bldg.)
  • Neptune Wellness (NEPT:TSX) – Market Cap $388 Million ($20M Cash / $13M Debt / $46M Bldg.)

INDUSTRY STATS – A VERY STRONG CASE FOR EXTRACTION

Internationally, Marijuana (Cannabis) is very popular for recreational purposes. But for decades it has been perceived as something “smoked”. But times have changed dramatically – and continue to change. To think most Cannabis users will want to “smoke” a product when other options are available (vaping, edibles, tinctures, capsules), is believing the Marlboro Man still makes a great marketing icon.

There is no doubt smoking Cannabis will always have its share of fans. But there are countless more people (including reformed smokers) who want nothing to do with smoking – and even more people who don’t consume Cannabis and cannot stand the smell of it.

For medical users of Cannabis (CBD in particular), you have people that are taking a product for “medical” purposes, yet they are smoking it and harming their health in a different way. It doesn’t defeat the purpose of why they are consuming Cannabis, but most health-conscious people don’t want to inhale smoke. While Vaping has its own share of questionable health issues, it is perceived by the younger generation as being far safer – you only need to look at the incredible popularity of Juul and flavored e-cigarettes.

So, as Bob Dylan says, the times they are a changing. And Cannabis companies to survive will need to evolve with these changes. Which means those companies specializing in plant science and extraction (like AREV) will have a very promising future ahead of them.

Below are useful (relevant) industry stats that originate from Deloitte.

Also note that statistics show the average frequent Cannabis user spends $70 US/mth – less frequent users spend $20/mth

AREV FUNDAMENTALS – SUMMARY

  • Their core  business is not to cultivate Cannabis plants for sale in the dried flower business. It is to focus on Breeding, Genetics, and Extraction. AREV hopes to work with LP’s in Canada who can “contract grow” their genetics. AREV would enter into off-take agreements to repurchase the crop for extraction into ingredients that will be used in their own formulations.
  • AREV has completed site preparation and is ready to erect an 8,500 square foot processing facility on their 28-acre property in Sorrento BC – where they would apply for a hemp license and a Health Canada processing license.
  • The BC Bud (BCBD) team over the past twenty years has mastered online sales and customer service. They will utilize these skills in American States starting with California and will enter other legal states via strategic contracts. They have also completed the preliminary assessment of deploying resources in Columbia.
  • BC Bud Depot has one of the largest and revered seed banks in the world containing hundreds of genetics of which over 40 have won Cannabis Cups in International competitions. Their breeders are some of the best in the world and their network of International Cannabis experts is extensive.
  • Marketing >>>:
  • For the next decade (prepaid) they have control over the (2 page) inside cover of High Times Magazine – High Times has over 200,000 monthly subscribers to their print publication.
    • The BC Bud Depot website averages 2,000 new visits weekly
    • They have 50,000 names of Cannabis customers in their database (15,000 in Canada)
  • Focus on 5 to 10 “Top Tier” products targeting very specific uses / benefits (and provide genetic certification)
  • Advance genetics work to identify specific traits of each strain. Including:
  • custom cloning / breeding
    • leverage BCBD seed bank (one of the largest in the world)
  • In California they have entered negotiations with companies in several cities
  • They will continue to identify small to mid size leaders in the Cannabis industry who would like the benefits of a public company but would like to still maintain decent ownership / control (ensuring they have a significant vested interest benefits both parties).
  • AREV will maintain and grow a list of “potential deals” and as the share price improves, they will use the higher priced paper to raise capital and provide stock in exchange for ownership (up to 50% with option to increase down the road). This strategy protects the existing (early) shareholders and helps maintain a healthy share structure that isn’t overly dilutive (as we are seeing with many public companies in this sector).

High Quality Genetics / Strains + High Yield Per Acre + High Volume / High Quality Extraction to Produced Certified High-Quality Retail Products with High Profit Margins / Cashflow

Similar companies focused on the extraction side of the Cannabis industry (as noted earlier in this report) are valued in the range of $350 to $550 Million CDN. This is 23 to 36 TIMES greater than the current market cap of AREV.

Clearly leaving room for capital appreciation of AREV.

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Danny Deadlock / MicroCap.com

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DISCLOSURE:

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