THC Global Group Limited (ASX:THC) is an Australian medicinal cannabis producer with a vertically integrated business model—and a "farm to pharma" strategy—that could be on the verge of winning the extraction capacity arms race.
THC Global aims to corner all aspects of the cannabis market and already has several growing sites established in Australia, along with an industry-leading biopharmaceutical facility, and recently acquired domestic manufacturing license, which will allow THC to engage in product validation and study trial production.
The company's crown jewel is its newly opened Southport Facility, which is now the largest bio-floral extraction facility in the Southern Hemisphere, with an estimated processing capacity of 120,000kg of cannabis per year.
Our scale and technology will enable us to offer patients a higher quality, more consistent cannabis medicine at a significantly lower cost than the current imported products available to Australian patients.THC Global CEO, Ken Charteris
As a result, the company now has the capacity to support more than 250,000 Australian patients, while also maintaining enough additional supply to begin exportation into the global cannabis market.
The facility is fully licenced and permitted for the processing of medicinal cannabis, with shipping of raw cannabis plant having already commenced from the company's Bundaberg Facility to Southport for product validation extraction.
This is great news for investors, as extraction is one of the fastest-growing areas of the cannabis market, with products that typically generate larger revenue and increased margins.
And this seems likely to continue in future, as there is a growing demand in Australia—where oil is the only legally available form factor—and Canada, which recently legalized edibles and extracts. In fact, the global cannabis extract market was estimated to be worth as much as $5.3 billion in 2018, and is expected to exhibit a CAGR of 22.1% in the lead up to 2025.
More importantly, extract sales also typically tend to be contract-based, which will ensure that the company continues to generate steady cash flow with solid margins.
Aside from its Southport and Bundaberg facilities, THC Global has secured close to 150,000 square meters of land for a proposed large-scale cultivation and manufacturing site at Jenbrook, in Ballina.
The company has plans to construct a 30,000 square meter greenhouse—capable of producing over 50,000 kilograms annually in the first stage of production—at the site, which will bring significant scale to THC's production.
THC Global also has a fourth growing site which will be located in Nova Scotia and have the capacity to produce over 37,000 kilograms per annum, as well as being capable of incorporating extraction capabilities into the plant.
THC Global's Southport Facility
Earlier this year, THC Global officially opened its new Southport Facility, increasing its annual production capacity to approximately 12,000kg of Good Manufacturing Practices (GMP) certified Active Pharmaceutical Ingredient (API) isolates—or equivalent quantities of full-spectrum and broad-spectrum extracts—making it the largest bio-floral extraction facility in the Southern Hemisphere.
Once the extraction and isolation process is complete, the company will then process these formulations into finished medicinal products, including oils, tinctures, and capsules.
THC Global will be making high quality medicinal cannabis more accessible to Australian patients in need, both in terms of heavily reduced cost as well as increases in available supply. We also expect to support clinical trials and study trials in Australia, which are currently almost exclusively serviced by expensive imported products.THC Global Chairman, Steven Xu
The facility was also granted a Manufacture Permit by the Australian Office of Drug Control (ODC) in November, which means the company can officially begin producing cannabis-based medicine.
The commencement of commercial production in early 2020 will allow THC stock to remain "highly competitive" in both the Australian and global cannabis markets, due to the reduced costs associated with the company's vertically integrated production model.
"THC Global is in a prime position with its primary cultivation, processing, and manufacturing assets of commercial-scale secured and ready to commence operating at low cost."
"[This will enable] access to Australian patients at a better price, and [make] Australia a prime exporter of medicinal cannabis products of the highest safety and quality standards," a spokesperson said.
"I have the largest extraction facility in the southern hemisphere certified, ODC permitted to extract medical cannabis coming online now. No-one else has that. Haven't even built it."THC Global CEO, Ken Charteris
The facility will also make use of its world-class extraction capabilities to explore other botanicals, in an attempt to discover formulations that could become the 'Next Generation of Medicinal Cannabis'.
THC stock can expect to begin seeing revenue generated by the sale of medicinal cannabis products produced at its Southport Facility—and other manufacturing sites—by early 2020.
The Bundaberg Facility and Eden Farms Projects
The Bundaberg Facility is fully licensed by the ODC for Cultivation and Research & Development, holding the full suite of cannabis licences under the Australian medicinal cannabis regulatory scheme, including a Cannabis Research Licence, a Medicinal Cannabis (Cultivation) Licence, and a Manufacture Licence, allowing for farm-to-pharma production at the site.
Earlier this year the company was also granted Schedule 8 Controlled Substance (S8) and Schedule 4 Prescription Medicine (S4) Manufacturing and Wholesale Licences from the Queensland Department of Health, which were a key requirement for the commencement of supply and distribution of medicinal cannabis products.
However, the licenses will also allow the company to utilise on-site analytical lab equipment, which will significantly reduce the cost of product research and development and strengthen its quality and safety assurance capabilities. This is extremely important, as the THC stock is currently pursuing GMP certification for its medicinal products.
"This licence is a significant milestone for the company, with the next targets being the development of a new generation of proprietary medicinal cannabis products and securing our revenue outlook through offtake agreements and furthering our existing global partnerships."THC Global Chairman, Steven Xu
The company recently marked its 28th harvest at the Bundaberg site—which has been earmarked for processing at the Southport Facility—with the previous 27 having been used for research and development purposes.
Additionally, the company has also leased more than 6.6 hectares of hydroponic greenhouses and 18 hectares of land from Eden Farms near Bundaberg, which will be repurposed to produce an additional 80,000kg of dried cannabis.
According to the CEO of THC Global, Ken Charteris, securing the Eden Farm site will allow the company to fast-track cultivation "without having to undertake a multi-million dollar capital expenditure program which could take years to become operational."
"This facility complements our existing cannabis production assets in Australia."
"As we commence cultivation at the Eden Farms facility in the coming months, our cultivation capacity will exceed 1,000,000 cannabis plants annually, supporting our medicinal cannabis medicines production at the Southport Facility as well as our medicines research and development programs," Charteris said.
Aside from cultivation activities, the company also intends to use the facility for the validation and testing of strains, genetics, and trials.
And thanks to its Manufacture License, THC Global will be able to explore the development of new formulations using small scale extraction at the Bundaberg site, significantly reducing research costs and accelerating future product development.
According to the CEO of THC Global, Ken Charteris, the company is already engaging in tissue culturing at the Eden Farms site, which will allow the company to support large scale production making them the "lowest cost producer here in Australia.
As a result, THC now has access to the most variable cost space possible, which will allow the company to proceed with minimal capital going forward—with assets ready to deploy and licenses others couldn't get—however, its biggest asset is scale.
Eden Farms exceeds any other project that's planned. It has a capacity of between three quarters to a million plants per annum. The only capital required is to bring up security, which is probably around a couple of million dollars. Even that's even being too generous.THC Global CEO, Ken Charteris
"When fully operational, Eden Farms will be able to grow multiple strains and multiple breeds. We have strains of CBD. We have the technology and expertise. We have an existing hydroponics farm, so I don't need to spend $110 million like the Cann Group. Our facilities do exist. So that's a big difference to everybody else," Charteris said.
"Going forward over the next 18, 24 months, we're not trying to build out to meet some hypothetical capacity. We already have the assets."
"The other difference is when you look at those two elements, Southport and Eden Farms—and include our research facility and tissue culturing—all that's in play right now, but we also have control of the scalability."
THC Global's Canadian Operations
The THC stock's Canadian operations include its hydroponics equipment division, Crystal Mountain, which reported a maiden unaudited profit of over A$100,000 and unaudited trading revenue for the half-year exceeding A$2,000,000.
And Crystal Mountain hasn't stopped there, with the most recent quarter generating more than $1 million in cash receipts, while unaudited trading revenue for the year to date reached over $3 million.
During the most recent quarter Crystal Mountain also launched a hydroponics equipment products and service offering which is intended to strengthen the company's B2B offering.
We're giving guidance of $5 million, with the revenue forecast for the 2020 focusing exclusively on the hydroponics component of the company. That company is going through a nice refreshment position. We've got new products, new services and a very talented COO.THC Global CEO, Ken Charteris
At the same time, the company also intends to use this service to position itself a comprehensive growing package for cannabis cultivators.
The company's improving performance was also driven by a significant expansion of its distribution network—which has now grown to include Europe, the UK and North America—along with the continued improvement of its marketing position.
Due to this sustained growth, THC stock expects to see sales revenue from Crystal Mountain exceed $5 million during 2020.
The company is also in the process of developing a new cannabis cultivation facility in Nova Scotia, Canada, which is expected to begin construction in the coming months. The initial stage of this project will involve the construction of a 20,000 square foot cultivation site, with the installation of extraction and processing facilities currently being planned for a later date.
According to the THC Global CEO, Ken Charteris, the company is also exploring new cannabis nutraceutical formulations with its' Canadian partners, following its deregulation in the country.
"There's a lot of really great opportunities for high margins, to add value. We're seeing that whole hydroponics business and the bolt-on of our cannabis sector. We treat Canada as a great opportunity," Charteris said.
As part of this, THC Global recently conducted a survey of the land acquired for the facility, which found that the site is a total of 44,500 square meters, allowing for a significant expansion of the company's current plans following the commencement of initial revenues.
THC Global has also received a Letter of Readiness from the Canadian cannabis regulator, putting the company in a unique position where it can potentially grandfather the Nova Scotia project into the previous cannabis regulations.
We treat Canada not as Crystal Mountain, but as a country that has opportunities not only in hydroponics, but also moving towards cannabis, sales and handling the importation of Australian pharmaceutical product.THC Global CEO, Ken Charteris
This is huge news, as it will allow to company to advance through the licensing process substantially faster. As a result, THC Global have attracted a number of potential funders for the project who are in late-stage negotiations with the company.
This is great news for investors, as it will allow the project to achieve revenue-generating production in the near term, while also reducing the need for upfront capital outlay.
The company also expects to begin to see additional revenue opportunities arise in Canada now that the regulatory changes surrounding Legalization 2.0 have come into effect, allowing THC to begin production of cannabis extracts, edibles, and topicals.
THC Global's Increasing Product Sales
THC Global has continued to be a distributor of CBD oils to patients in the New Zealand market—which features broader regulations that allow for an easier prescription process—under its exclusive distribution agreement with Endoca.
In aid of this, the company launched a new CBD information portal earlier this year, along with increasing its supply of CBD oils.
Launching a product in New Zealand with our partner, Endoca, has provided the Company and its team the opportunity to develop strong supply chain pathways, understand the local regulations, and engage with doctors, pharmacies, patients, distributors, wholesalers and other participants in the medicinal cannabis supply chain.THC Global CEO, Ken Charteris
Additional stock has already been ordered in anticipation of further demand after the entirety of THC's most recent shipment sold out.
The company has confirmed that it intends to harness its understanding of the New Zealand market to bolster the upcoming launch of its "Canndeo" branded medicinal cannabis product range, which will be produced at its Southport Facility in 2020.
The strong patient uptake enjoyed by the company's imported product offering also indicates that the Canndeo brand will likely enjoy similarly strong sales once it begins importation into New Zealand next year.
Aside from Canndeo, THC Global will also be supplementing its income next year with the sale of "sponsored international G&P product", which will be available from the first quarter of 2020.
These will likely enter the market prior to the company's range of branded products and will also be sold under the Canndeo range.
"If you take 25,000 patients next year, it's not hard to guess that we'll have a reasonable percentage which will be supported in revenue by the product we sponsor from overseas, and then supplement it with our Australian produced product. The Australian produced product will come in—with full demand and revenue opportunities—by about the second and third half of next year," THC Global CEO Ken Charteris said.
"We'll be able to report forecast of sales overseas probably by the second half of next year, and that's not offtake agreements. We'll be bulk dispatching pharmaceutical material predominantly to Canada first of all and followed by Europe. Naturally New Zealand we treat like the eight state of Australia and their CBD laws are quite different, so we'll see some more channelling and marketing there on the CBD end."
"So, we'll see an improvement there. It will be a combination of imported product gradually substituted with Australian product. We more than likely will register our CBD product in New Zealand by about the third quarter as well, which will give us a substantial petty advantage."
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THC Global Revenue Growth Performance
THC Global's Canadian hydroponics equipment business, Crystal Mountain, has continued to enjoy strong revenue growth in 2019.
The most recent quarter saw the company rake in more than $1 million in cash receipts, while unaudited trading revenue for the year to date has been over $3 million.
During this period the company also launched a new hydroponics equipment products and service offering, focusing specifically on cannabis cultivators in the Canadian market. This will help to strengthen its B2B offering, while also simultaneously positioning the company as a complete package offering for cannabis growers.
In our case, we're not first movers, we're infrastructure builders. We've built a low-cost network that actually complies with all regulations that will support Australia and support global opportunities where we can be competitive.THC Global CEO, Ken Charteris
As a result of this continued growth, THC Global expects to see sales revenue from Crystal Mountain exceed $5 million in 2020.
According to the CEO of THC Global, Ken Charteris, the biggest factor impacting their third and fourth quarter revenue in 2020 will be scalability. Luckily, the company is confident that it will be able to scale up to international volumes, which will involve a large amount of "build out to be done in growing".
The company also expects to continue seeing strong sales in the Australian market, through a combination of sponsored products and the company's own product range.
THC Global has also begun receiving numerous requests for its extraction services from licensed and permitted growers, as they have few other options available to process their cannabis material.
"That gives us access to very low cost by mass, which people never considered here before. So, it does give us a unique leverage position that others can't offer. No-one else can offer that at all."
"We're making it very easy for people to do business, to assist Australian patients and our patients with gaining access to high grade medicine. While the ODC licensing and permitting has been difficult and costly, it has also put us ahead of the pack in all assets, particularly our extraction facilities."
"That means others who are at growing facilities that can't come online, we now can liberate that, and we have control over the cost, which is great," Charteris said.
The latest news relating to the THC Stock
THC Stock Provides Update On NZ Operations – The company updates the market with an overview on their New Zealand operations, covering their Endoca product distribution as well as their information portal for cannabis prescribers.
THC Stock Gets Green Light to Manufacture Cannabis – The Southport Facility was recently given the go-ahead from the Australian Government to kick off the manufacture of cannabis medicines.
THC Stock Announces Market Update – Earlier this month the company provided an update on the progress of its current projects, including patient numbers and the Southport Facility.
Should I buy THC Global stock?
THC Global has a strong financial balance sheet
- The Southport Facility has been valued at $16 million, with a replacement value of $35 million.
- The company's last audited net asset position was over $28 million, without any debt across the group.
- A substantial increase in material revenue is expected in 2020, as the THC stock ramps up its cannabis production efforts.
THC Global's commercial offering is already seeing significant demand
- The company's hydroponic equipment division, Crystal Mountain, has reported more than $1 million in cash receipts during the most recent quarter.
- Products from the first shipment of THC's distribution agreement with Endoca have already sold out in New Zealand.
- Based on this demand, the company expects to see a considerable increase in sales revenue when it launches its Canndeo product range next year.
THC Global has an industry-leading cannabis extraction facility located in Southport, Queensland
- The Southport Facility is the largest bio-floral extraction facility in the Southern Hemisphere.
- It will increase the company's annual production capacity to approximately 12,000kg of GMP certified API isolates, which can then be processed into medicines and other products.
- The company is now capable of supporting more than 250,000 Australian patients, with enough product left over to engage in global exportation.
Disclaimer: Past performance is not an indicator of future performance.
The Forward Outlook for THC Global
The THC stock has continued to demonstrate a strong balance sheet in 2019, without any debt across the group. The Southport Facility has been valued at $16 million—with a replacement value of $35 million—while the last audited net asset position of the THC Global was over $28 million.
However, the company expects to see this significantly bolstered in the coming year, as THC expects to begin seeing material revenue from its Australian medicinal cannabis operations by early 2020.
The company's cultivation project at the new Eden Farm Facility in Bundaberg is also set to begin growing in the coming months, which will increase its cultivation capacity to 1,000,000 cannabis plants annually at low cost with minimal capex.
These plants will be used to support its Medicinal cannabis production at the Southport Facility, as well as additional research and development programs.
THC Global is now on the cusp of commencing the most significant medicinal cannabis operation in Australia, with the capacity to support over 250,000 Australian patients with high quality, consistent, affordable medicines early next year.THC Global CEO, Ken Charteris
As a result of its increased capacity, the company is now confident that it will be able to take on two major issues facing Australian patients: the high cost of imported medicinal cannabis, and the lack of consistency in product quality and supply chain management.
THC stock will be able to deliver this thanks to its vertically integrated business model, which allows the company to achieve low-cost production, while also allowing for significant production scale.
According to the CEO of THC Global, Ken Charteris, the company's primary goal going forward is to see the commercial-scale production of medicinal cannabis products at the Southport Facility kick-off by early next year, which will be followed by a subsequent entry into the global export market.
"Following a period of working to acquire the right assets and building the right team, THC Global's Board and Senior Executive team have taken our Company to the first step of its revenue growth story," he said.
"We look forward to finalising product validation and other smaller steps this year, and to commencing commercial production of Australian produced medicinal cannabis medicines in early 2020."
The company's management has also confirmed that they expect to see a "strong increase in patient numbers" over the next 12 months, as THC commences commercial-scale production activities in earnest.
Eagle-eyed investors should keep an eye on this, as it could drive significant movement in the stock price.
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