Franchise Cannabis Releases Shareholder Update Letter
We are pleased to provide an operations and financial update on Franchise Cannabis Corp. (“Franchise”, or “The Company”). Franchise Cannabis was formed under the premise that we have a comparative advantage based on our world class collection of genetics built over several decades. Since our equity financing was completed last year, we have executed on a number of initiatives and completed four complementary acquisitions. We now have a stable of assets in two continents, with attractive growth profiles, combining large European markets with low cost South American operation. The company is now entering the infrastructure and build-out phase, and we’re on our way to becoming a dominant, fully vertically-integrated company with a global platform.
Our strategy has been focused around Europe for a number of reasons. Firstly, the Canadian market is highly competitive and relative to Europe, fairly small. The big Canadian companies have already established market share for the recreational and medical markets. Secondly, south of the border in the US, six to seven dominant players have emerged over the past year with massive footprints and large capital backing. The US market has intense competition and, in our view, only the biggest companies will win. Finally, Europe is the last frontier in the developed world where there are no established, dominant players that have seized the opportunity. Franchise has an opportunity to emerge as a dominant player in European cannabis.
We are invigorated by the opportunities we’re seeing in Europe at the moment. New regulations, patient growth each month, and distribution opportunities abound. There is a window of opportunity right now to be on the forefront of this growing trend, with new countries opening up and shifts in the industry legal dynamics. Germany will be an engine of growth in the region.
An analogue we look to is the telecom sector around the turn of the 21st century. The opening up of the cannabis industry on a global scale is akin to telecom spectrum – it’s a race to get as much real estate as possible in as many countries as possible, and build market share in places where there is no market currently. In the end, if you don’t have a license, you won’t be able to play. For countries large and small, each place will have a market in the cannabis space at some point in the future, and at Franchise we want to be able to get there before the markets become mature and big industry dynamics come into play. Furthermore, as countries open up to import/export, a true global trade will evolve, and we have designs to sit in the slipstream. In our view, tourism will also be a burgeoning industry for many of the smaller nations.
From a Euro-centric standpoint, we believe we are heading into the third of nine plus innings of the cannabis revolution. The future is bright indeed, and we are excited to be moving into another year. We continue to execute on our strategy and adapt to the dynamic environment as opportunities emerge. Europe is set to become the world’s largest legal cannabis market in the next five years, with a population larger than the USA and Canada combined. The European market could easily grow to $50 billion per year, and we are just at the outset.
Germany and the European Market – The Growth Engine
The acquisition of ACA Müller ADAG Pharma Gmbh (“ACA”) has been the company’s most exciting acquisition to date. ACA is one of the largest medical distributors in Germany. The German market is severely supply constrained, and there is simply not enough product to go around. A growing number of pharmacies are constantly calling around looking for suppliers of new stocks. This trend is expected to continue as more patients continue to receive prescriptions for medical cannabis. The company has three decades of experience in pharmaceutical distribution and became 100% cannabis-focused in 2017 and is now in over 1,000 of 5,000 pharmacies in Germany that can legally sell medical cannabis.
Our German business has many opportunities for growth on a macro level. Germany a country of 83 million people has only 30,000 registered patients, providing significant growth potential given it is a large wealthy country in the heart of Europe. Compare this to Canada’s growth curve: Germany is now where Canada was in 2015, but it has 2.5 times the population, and one that is surrounded by multiple other countries that are just starting to open up to cannabis. Margins are also very healthy at €9.50 per gram at the wholesale price to the pharmacies. Furthermore, the government subsidizes about 1/3rd of all prescribed cannabis in the country.
Operationally, there are many opportunities to make the business more efficient and build a framework that is competitive on a national and international scale across the European markets. Our team understands the regulations and processes related to handling GMP certified product. We are also efficiently implementing modern technology; for example, shifting all our pharmacy orders and shipments to an online portal for purchases integrated to our ERP system. It’s all very secure and regulated, and we are drawing out which aspects of the paper trail we can take digitally. Refreshing the website will allow people to view what’s in stock and facilitate online purchases. We are hiring branding, marketing and sales teams to update the appearance and brand presence of the company. Finally, analytics of sales data from our ERP system and the capture of various geographic and patient segments will be key to our growth.
For 2019, we have a quota from the German Health Ministry to import product from Bedrocan in the Netherlands; however, it is extremely important for us to build out internal supply within the European Union in Denmark and other jurisdictions. Being able to cultivate our own supply within the EU will not only increase our monthly sales volume and gross margins, but will also allow us to provide patients with a broad array of products to meet their health needs. We believe that the German market will continue to demand higher quality, targeted products. Our expertise will allow us to offer that to build market share and drive revenue growth in this nascent market.
In Denmark, we have entered into a definitive sale and purchase agreement to acquire a medical cannabis THC cultivation and distribution license and small indoor facility. Denmark is a great country to work in, with great people and a supportive ministerial and regulatory environment. Our cultivation team is on the ground and preparing the first cultivation. The goal is to work with our team of GMP experts to set the standards in place, and get GMP certification from the Danish Medicines Agency. Since Denmark is an EU nation, a domestic GMP & GACP stamp of approval is all that is needed to begin importing product into Germany. This is a huge advantage and will allow us to streamline the process. Once we have mastered the formula and regulatory requirements of GMP with the Danish Medicines Agency, we will continue to scale up our operations. We plan to build out a supply chain of product to market in Germany and across other countries as they permit. Phase II Denmark is going to be a large-scale world class cultivation facility in excess of 200,000sf in the coming months.
Latin America – Low Cost Grow Operations for Those that Can Scale
Uruguay was the first country in the world to legalize recreational cannabis back in 2013. This peaceful country is widely regarded as the Switzerland of Latin America due to its stability, safety, and lack of corruption – essentially, it is a great place to do business. We recently acquired Adelnor SA, a licensed CBD producer. Adelnor planted hemp on over 100 acres last November. The hemp stalks are currently over two meters and are expected to be harvested mid-year. We are installing our industrial-scale dryer systems and extraction equipment over the coming weeks, and preparing to extract tens of millions of dollars of product (while also preparing our larger planting in July). This Fall, we expect increase our planting significantly and will be using contract farmers. We are in the process of registering our proprietary, high-CBD strains to have a sustainable competitive advantage in our cannabinoid yields versus our competition.
Over the longer term, Colombia is an optimal place to produce high quality, bulk, low cost cannabinoid products for the consumer products, supplements, and cosmetics industries. The country has an internationally respected regulatory framework, incredible year-round sun and climate, and low cost of land and labor. We have the perfect set of genetics for the region that will be put to good use. In Colombia, we have finalized our Phase One cultivation and engineering plan and will begin installing fencing, security systems, irrigation, and green houses on a portion of a 100-acre property in Colombia in the coming weeks. We have made initial registrations of both high THC and CBD genetics in the country, and look forward to finishing the characterization process of our strains to begin commercial production in Q1 2020. We are about six months behind the leaders in the Colombian market and as of yet, no one has received final approvals for commercial production for domestic sale or export. Franchise sees Colombia as well-positioned to become a world leader in the low-cost cannabinoid
While we have a world-class collection of various strains that are suited to the environments in Colombia and we continue to massage our breeding strategy going forward. In our view, we have better strains than the competition and a solid inventory of
- Acquisition of ACA Müller ADAG Pharma Gmbh – This February we closed on the acquisition of the fourth largest distributor of medical cannabis in Germany. This acquisition makes Franchise a leading European player with a golden opportunity to accelerate growth as Denmark cultivation comes online. Our German distribution center, located near the border with Switzerland, will be our European distribution center with shipments expected to grow within Germany and across the European Union.
- Uruguay Hemp Harvest – Near-term, we will begin our hemp harvest on 100 acres in Uruguay. Our three massive seventy-foot drying units are working away churning out dried hemp material. Dried product will then sent to a free trade zone for processing. In 2H19 our C02 extractors will be delivering full-spectrum CBD-products.
- Registration of Top 41 Strains in Colombia – In December of last year we successfully registered 41 of our top strains with the Ministry of Agriculture in Colombia. We now can begin the process of characterizing these strains, and work toward getting a green light to commercial production of both THC and CBD dominant strains.
- THC License in Denmark: GMP Build Out – In March of this year we signed a binding definitive agreement with Rangers Pharmaceuticals A/S, with a THC cultivation and distribution license. Our GMP experts and cultivation team are now on site. We have imported R&D equipment, set up the lights and rolling tables, and imported our seeds. We will begin our first planting this month and expect to achieve GMP status and begin exporting product to Germany by end of year.
- M&A Opportunities – We will continue to evaluate numerous M&A opportunities in many markets across the European Union and abroad. We will only acquire assets that are strategic that will add value to our company and growth profile ahead.
Since inception, Franchise has always been a patient-centered company focused on helping change the world for the better. The more we grow in the various jurisdictions we operate in, the more we have a real social responsibility to the end user and to the nations in which we operate. Europe and other nations are still largely behind on education and legislation and we pride ourselves on being leaders in the field. In growing our company, we are helping governments, growing industries in new jurisdictions, creating employment opportunities in foreign nations, and, most importantly, helping heal people.
We look forward to a successful 2019 as we continue to execute on our strategy. We’d like to take this opportunity to thank all of our shareholders and stakeholders. An updated website with a new investor presentation will be available shortly at www.franchisecannabis.com. For any questions please email us at email@example.com.